Weekly Municipal Monitor

Markets Last Week

Fixed income rallied last week as growing risk aversion outweighed persistent inflation concerns and higher energy prices. Worries about artificial intelligence-related investment grew as the Nasdaq 100 Index fell roughly 2.9% on Thursday, while mounting fiscal concerns pushed French government borrowing costs to multidecade highs. Economic data continued to point to resilience. Initial jobless claims declined and fell below expectations, while University of Michigan consumer sentiment and manufacturing Purchasing Managers’ Index data both rose and were above consensus.

Treasuries rallied across maturities and the curve flattened, with yields falling 8 basis points (bps) in 10-years and 10 bps in 30-years. Municipals outperformed as improving technicals pushed high-grade tax-exempt yields 23 bps lower in 5-years, 22 bps in 10-years and 12 bps in 30-years.

Supply and Demand Technicals

Weekly reporting municipal funds took in US$1.6 billion of net inflows in the week ended October 21, matching the prior week, according to Lipper. Tax-loss harvesting continued to shape flows, with ETFs gaining US$3.7 billion while open-end funds lost US$2.1 billion. Long-term funds led with US$1.5 billion of inflows, while intermediate funds saw US$655 million of outflows. Investment-grade funds accounted for all of the inflows, as high-yield funds lost US$756 million. Year-to-date net inflows now total US$77.3 billion, US$31.7 billion ahead of last year's pace.

Last week's new issue supply totaled US$14.9 billion, 53% above the prior week's US$9.7 billion. Year-to-date issuance reached US$515 billion, 11% ahead of last year's record pace. Tax-exempt issuance accounted for US$485 billion of the total, also 11% above the prior-year pace, while taxable issuance of US$30 billion was running 8% ahead. As the heavy October calendar cleared, 30-day visible supply fell 32% week over week to US$13.4 billion, though it remained 42% above the US$9.4 billion visible at this point last year.

This Week in Munis: 2026 Election Series—Tax Policy on the Ballots

On Election Day November 3, much of the news will focus on red states, blue states and which party controls Congress. For municipalities, it is also about green dollars flowing into state and local government coffers. Voters across the country will consider tax proposals that could reshape how governments raise revenue, fund essential services, and manage long-term financial obligations.

The 2026 election follows a multiyear push by state legislatures to reduce taxes. According to the Tax Foundation, 26 states have lowered individual income tax rates since 2021, and eight implemented additional reductions at the beginning of 2026.¹ Many of those changes were enacted during a period of unusually strong post-pandemic revenue growth, bolstered by federal stimulus, robust capital gains, and expanding economic activity.

Today, the outlook is less forgiving. Revenue growth has moderated, spending pressures persist, and changes in federal funding are creating new uncertainty. At the same time, rising property values and mounting affordability concerns have intensified demands for tax relief. State lawmakers have begun responding, but now voters are being asked to weigh in. From taxing billionaires in California to expanding property tax exemptions in Florida, these measures offer a window into an increasingly complicated fiscal landscape.

Colorado: Rethinking the Flat Income Tax

Colorado voters will consider Amendment 87, which would replace the state's 4.4% flat income tax with a graduated structure beginning in 2027. The measure would lower taxes for most taxpayers while raising rates on higher-income households. According to state legislative estimates, the proposal could generate approximately US$2 billion in additional annual revenue in its first full year.² The incremental funding would be directed toward education, health care, and early childhood programs.

However, voters will also consider Proposition 136, which would cap the state income tax rate at 4.4%, potentially conflicting with Amendment 87. Another proposal, Proposition NN, would expand the amount of revenue the state can retain and spend under its Taxpayer's Bill of Rights, or TABOR.

For municipal investors, Colorado's ballot illustrates how tax structure, constitutional revenue limitations, and spending priorities can intersect. Additional funding could support important state programs and reduce fiscal pressure, but a greater reliance on higher-income taxpayers could also increase revenue volatility and sensitivity to economic and financial market cycles.

California: A Tax on Wealth, Not Income

California voters will consider Proposition 40, which would impose a one-time 5% tax on the net worth of individuals with more than US$1 billion in wealth. Sponsored by a state health care union in response to federal funding reductions under H.R. 1, the measure could generate tens of billions of dollars over several years. Ninety percent of the proceeds would support health care, with the remainder directed toward education, food assistance, and related costs.³ Competing Propositions 41 and 42 could limit or invalidate the tax, however, depending on the election results and subsequent legal interpretation.

The proposal underscores California's longstanding dependence on a relatively small number of high-income taxpayers. Personal income tax collections, particularly those tied to capital gains, can fluctuate sharply with financial markets, contributing to a feast-or-famine budget cycle. Although Proposition 40 could provide substantial near-term funding, it would not create an ongoing revenue source. The measure also raises questions about asset valuation, taxpayer relocation, and California's economic competitiveness. The Legislative Analyst's Office estimates that behavioral responses could reduce recurring state income tax revenue by nearly US$1 billion annually.⁴ A one-time infusion could ease immediate budget pressures, but it would not necessarily strengthen the state's recurring financial capacity or resolve its longer-term spending demands.

Washington: Reconsidering a Newly Enacted Income Tax

Washington state did not have a traditional income tax until earlier this year, when state lawmakers enacted a 9.9% tax on annual individual income above US$1 million, scheduled to take effect in 2028. Washington voters, who have considered and rejected income taxes several times, will decide this November whether to repeal the new tax through Initiative 645. The initiative would also prohibit future state and local individual income taxes.

The outcome has implications beyond the immediate revenue estimates. Washington has historically relied on sales, business and property taxes, and the new tax would diversify the state's revenue structure although collections from high earners could be economically sensitive. For municipal investors, the vote could affect both Washington's future revenue flexibility and the options available to policymakers during periods of fiscal stress.

Florida: Property Tax Relief and Local Government Revenues

In Florida, the debate centers on property taxes rather than income or wealth. Voters will weigh on Amendment 3, which would expand the homestead exemption, potentially shielding up to US$250,000 of assessed value for qualifying homeowners from certain non-school property taxes. Although homeowners could see lower tax bills, the effects on counties, municipalities and special districts could be significant. The Florida Legislature's July 2026 Revenue Estimating Conference analysis projects that the measure could reduce local non-school property tax revenue by approximately US$4.9 billion in fiscal 2028 and US$11.8 billion annually once fully implemented.⁵

The effect on general obligation bonds may be more limited because tax rates generally must be increased as necessary to meet debt-service requirements. The greater credit concern is the loss of recurring operating revenue used to support public safety, infrastructure maintenance and other essential services. Local governments could face pressure to reduce spending, raise other revenues or shift more of the tax burden to remaining taxable properties. School property taxes and school district bonds would not be affected, an important distinction for school district credit.

Florida lawmakers have considered compensating certain fiscally constrained counties for lost revenue, but the state has not established a comprehensive reimbursement program. For municipal investors, the proposal illustrates why property tax policy is central to credit analysis: even financially healthy local governments may face challenges when their capacity to raise recurring revenue is restricted.

Looking Beyond Election Night

Midterm elections are often overlooked, but these tax measures could have meaningful implications for municipal credit and the after-tax relative value of municipal securities. The central question is not simply whether taxes rise or fall. It is how each decision could affect revenue stability, budget volatility and spending flexibility, and whether those risks are already reflected in market valuations. In our view, active management supported by a well-resourced credit team can help investors navigate these shifting dynamics.

Market Monitor

Market Monitor: Municipal Credit Curves