Repeal Tax Exemption for Municipal Bonds

Abstract:     
This proposal would repeal section 103, which now exempts interest paid on state and local bonds. The exemption wastes most of its federal cost. The fraction of the cost delivered to borrowers induces them to undertake projects that would not be rational given the real cost of capital. The exemption would be replaced with a budgeted payment to current borrowers to reduce their debt. Current bonds would be taxable prospectively but with a credit for discount or implicit tax that was of help to the borrower.

The proposal is made as a part of the Shelf Project, a collaboration among tax professionals to develop and perfect proposals to help Congress when it needs to raise revenue. Shelf Project proposals are intended to raise revenue, defend the tax base, follow the money, and improve the rationality and efficiency of the tax system.

Number of Pages in PDF File: 5

Accepted Paper Series