NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Federal Taxation and the Supply of State Debt

Gilbert Metcalf

NBER Working Paper No. 3255 (Also Reprint No. r1830)
Issued in February 1990
NBER Program(s):   PE

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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Document Object Identifier (DOI): 10.3386/w3255

Published: Journal of Public Economics, Volume 51, pp. 269-285, (1993) citation courtesy of

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