An Empirical Examination of Municipal Financial Policy
Current U.S. tax law creates a variety of incentives affecting municipal financial policy. Under current law,municipalities can borrow at a tax-exempt interest rate yet can earn the full market rate of return on any assets held. Residents, in contrast, if they borrow or lend as individuals,pay or earn the market rate of return but after personal income taxes. These differences in rates of return create a variety of arbitrage opportunities, allowing communities/residents to borrow at low rates and invest at higher rates.The purpose of this paper is to examine empirically the financial policy of municipalities in four states (Connecticut, Maine, Massachusetts and Rhode Island) to see to what degree these municipalities attempt to take advantage of each of the available opportunities to engage in tax arbitrage. Our datacomes from the 1980 U.S. Census of Population and Housing, and the 1977 U.S.Census of Governments. We find clear evidence that communities do actively engage in such tax arbitrage.
|Date of creation:||Apr 1985|
|Date of revision:|
|Publication status:||published as Gordon, Roger H. and Joel Slemrod. "An Empirical Examination of Municipal Financial Policy." State and Local Public Finance, edited by Harvey S. Rosen. Chicago: UCP, 1986, pp. 53-78.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
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- Roger H. Gordon, 1982. "Interest Rates, Inflation, and Corporate Financial Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 13(2), pages 461-491.
- Roger H. Gordon & Joel Slemrod, 1983.
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NBER Working Papers
1080, National Bureau of Economic Research, Inc.
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- Irwin Tepper, 1981. "Taxation and Corporate Pension Policy," NBER Working Papers 0661, National Bureau of Economic Research, Inc.
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- Sally A. Asefa & Roy D. Adams & Dennis R. Starleaf, 1981. "Municipal Borrowing: Some Empirical Results," Public Finance Review, SAGE Publishing, vol. 9(3), pages 271-280, July.
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