Federal Taxation and the Supply of State Debt
AbstractThis 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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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3255.
Date of creation: Feb 1990
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Publication status: published as Journal of Public Economics, Volume 51, pp. 269-285, (1993)
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