SALT Fear-Fueled Rally in Muni Market Faces Test as Taxes Due

The rally in the $3.8 trillion municipal-bond market is about to face a major tax-season test.

All year, analysts have credited the $10,000 cap on state and local tax deductions for driving a record-setting amount of cash into tax-exempt debt as investors look for ways to cut what they owe to the federal government. The wave of money helped propel a five-month rally that’s pushed yields on some municipal bonds to the lowest against Treasuries since at least 2001.

But it’s still not clear whether that influx was driven by investors who were sure to face higher tax bills—or those ...