Federal Tax Treatment of State and Local Securities. (Revised)

The federal income tax exemption for state and local government securities has been a controversial issue for many years. Opponents of the exemption believe that it is inequitable, reduces risk investment by high-bracket taxpayers, and costs an excessive amount to the federal government. Proponents argue that elimination of the tax exemption would make the cost of borrowing money to many state and local governments prohibitive. The purpose of the study was to try to narrow down the differences among experts in taxation and the municipal bond market on the facts and analyses with regard to this matter of public policy.