Cost of Local Issuance and State Corporate Tax Changes

Abstract

I study the impact of state corporate income tax rates on the funding costs of local public entities in the United States municipal bond market. Municipal bond issuance yields decrease steadily and reverse after a corporate income tax cut. Yields increase at a 1.8 basis points rate after the shock. The opposite is true for tax rises: municipal bond yields increase at a 1.36 basis point rate before a tax increase and decrease afterward. I also find that issuers increase bond issuance amount by 11.4% after a corporate tax cut and decrease bond issuance amount by 19.4% after a tax rise. The results support the hypothesis that state corporate income tax increases improve local funding costs.