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Federal Taxation and the Supply of State Debt

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Gilbert Metcalf

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Abstract

This paper presents a model of debt finance at the sub-national level from which municipal bond supply equations are derived. Federal tax considerations are shown to be important determinants of the price entering the bond supply equation. Using data on 40 state governments over a seven year period in the 1980s, I show that federal tax rates have an important effect on the supply of municipal bonds - independent of the demand side effect that is usually considered in the literature. Furthermore, the effect persists after controlling for capital expenditures, thereby suggesting that municipal bond proceeds are fungible at the margin. This has implications for the measurement of the tax expenditure associated with tax exempt debt.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3255.

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Date of creation: Dec 1993
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Handle: RePEc:nbr:nberwo:3255

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Alan J. Auerbach, 1985. "Real Determinants of Corporate Leverage," NBER Working Papers 1151, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Caplin, A. & Nalebuff, B., 1989. "Aggregation And Social Choice: A Mean Voter Theorem," Discussion Papers 1989_31, Columbia University, Department of Economics.
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  3. Barro, Robert J, 1979. "On the Determination of the Public Debt," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages 940-71, October. [Downloadable!] (restricted)
  4. Feldstein, Martin S & Metcalf, Gilbert E, 1987. "The Effect of Federal Tax Deductibility on State and Local Taxes and Spending," Journal of Political Economy, University of Chicago Press, vol. 95(4), pages 710-36, August. [Downloadable!] (restricted)
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  5. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October. [Downloadable!] (restricted)
  6. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-92, July. [Downloadable!] (restricted)
  7. Poterba, J.M., 1989. "Tax Reform And The Market For Tax-Exempt Debt," Working papers 514, Massachusetts Institute of Technology (MIT), Department of Economics.
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  8. Bergstrom, Theodore C & Goodman, Robert P, 1973. "Private Demands for Public Goods," American Economic Review, American Economic Association, vol. 63(3), pages 280-96, June.
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  9. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management. [Downloadable!]
  10. Metcalf, Gilbert E, 1990. "Arbitrage and the Savings Behavior of State Governments," The Review of Economics and Statistics, MIT Press, vol. 72(3), pages 390-96, August. [Downloadable!] (restricted)
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  11. Borcherding, Thomas E & Deacon, Robert T, 1972. "The Demand for the Services of Non-Federal Governments," American Economic Review, American Economic Association, vol. 62(5), pages 891-901, December. [Downloadable!] (restricted)
  12. James M. Poterba, 1986. "Explaining the Yield Spread between Taxable and Tax-exempt Bonds : The Role of Expected Tax Policy," NBER Chapters, in: Studies in State and Local Public Finance, pages 5-52 National Bureau of Economic Research, Inc. [Downloadable!]
  13. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
  14. Engle, Robert F., 1984. "Wald, likelihood ratio, and Lagrange multiplier tests in econometrics," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 13, pages 775-826 Elsevier. [Downloadable!] (restricted)
  15. Roger H. Gordon & Joel B. Slemrod, 1986. "An Empirical Examination of Municipal Financial Policy," NBER Chapters, in: Studies in State and Local Public Finance, pages 53-82 National Bureau of Economic Research, Inc. [Downloadable!]
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  16. Metcalfe, G.E., 1988. "Federal Tax Policy And Municipal Financial Behavior," Papers 29, Princeton, Woodrow Wilson School - Discussion Paper.
  17. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Inman, Robert P., 1987. "Markets, governments, and the "new" political economy," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 2, chapter 12, pages 647-777 Elsevier. [Downloadable!] (restricted)
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  1. James M. Poterba & Kim S. Rueben, 1997. "State Fiscal Institutions and the U.S. Municipal Bond Market," NBER Working Papers 6237, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  2. Heinemann, Friedrich & Winschel, Viktor, 2001. "Public deficits and borrowing costs : the missing half of market discipline," ZEW Discussion Papers 01-16, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research. [Downloadable!]
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