The Tax Foundation recently released an article urging the reexamination of the municipal bond interest exemption for federal income tax purposes. Under the current U.S. tax code, interest on state and local bonds is exempt from income taxes. However, there is debate that the original reason for this exemption, which is concern surrounding the constitutionality of taxing the borrowings of state and local governments, is no longer applicable.

The article argues that while one benefit of tax exemption should be that state and local governments are able to invest in infrastructure projects, it will also cause municipalities to overinvest in these types of projects and that the exemption applies to projects that do not need to be subsidized. Another argument is that the exemption is designed to provide benefits to taxpayers in higher income tax brackets, while shutting taxpayers in lower income tax brackets out of the municipal bond marketplace. Lastly, it is believed that the exemption is inefficient in that a small portion of dollars lost by the federal government ends up with state and local governments.

Please click the button below to read the Tax Foundation’s full article discussing the reexamination of the tax exemption of municipal bond interest and arguments from the industry.

Read the Tax Foundation Article

If you would like to discuss this article, please contact Allison Carter at alcarter@deandorton.com or 859.425.7645.