Building a Better America: Tax Expenditure Reform and the Case of State and Local Government Bonds and Build America Bonds

Abstract

Currently, most subnational government borrowing in the United States is done via tax-exempt muni bonds. But these bonds are riddled with problems. They are inefficient at delivering the subsidy, and they create economic distortions of investment choices. They are inequitable, and they have significant democratic deficiencies. Direct payment Build America Bonds (BABs) provide a better alternative, as they directly pay a cash subsidy to a subnational govern- ment. There are simple, technical problems that can easily be remedied, but BABs also face significant political hurdles that will prevent the permanence of the program. Policy entrepreneurship is a way forward. This article also discusses how the analysis used here can also be used on other tax expenditure matters.

Keywords: Taxation, Municiple Bonds

JEL Classification: K34, H74