Author's note: This article was co-produced with Beer Money Arb and was initially released to CEF/ETF Income Laboratory members on Jan. 20, 2021 with certain numbers updated.
BlackRock’s Two Driving Municipal Forces
The Trump Tax Cuts of 2017 capped the state and local tax deduction to $10,000, and with this rule change, drastically changed the tax sensitive planning of high income earning high income tax state residents. The usual slate of “coastal elite” states and jurisdictions like California, New York and New Jersey, especially residents of New York City and San Francisco, two cities that independent of the states and feds, also levy their own income tax. Also included in the legislation was a rule prohibiting the issuance of tax-exempt bonds in a refinancing of existing tax-exempt bonds, and taxable municipal bond issuances has increased since, shifting the calculus of financial planners seeking tax-exempt income. We’ll see what happens with the incoming Biden administration and if that will shift the muni landscape back to the pre-Trump era tax avoidance strategies, but the trends at work will take a while to trickle down and change currently established practices.
The second motivating force on BlackRock’s munis took the form of an active and well-known activist hedge fund named Saba Capital deciding to target BlackRock, as a fund issuer and manager, and several of BlackRock’s muni products in particular. The two parties were unable to resolve their differences via negotiation and the matter went to court, and Saba mostly came out victorious, forcing favorable outcomes on two Blackrock New York state muni funds. Closed End Fund Tracker had a nice summary write-up while the proxy war was in progress, and from there you could google for further news articles on the various going-ons.
So, with the background of changing client needs, a changing tax regime
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