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Portfolio Substitution and the Revenue Cost of the Federal Income Tax Exemption for State and Local Government Bonds

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  • Poterba, James M.
  • Verdugo, Arturo Ramírez

Abstract

This paper illustrates how different assumptions about household portfolio behavior influence estimates of the amount of individual income tax revenue that would be collected if the interest tax exemption for state and local government bonds were repealed or curtailed. Using data from the 2004 Survey of Consumer Finances, we estimate that federal income tax revenues would rise by $14.0 billion if current bondholders purchased taxable bonds, $8.9 billion if corporate stock replaced tax-exempt bonds in household portfolios, and $8.2 billion if they distributed their tax-exempt bond holdings across their other portfolio assets in proportion to their current portfolio shares.

Suggested Citation

  • Poterba, James M. & Verdugo, Arturo Ramírez, 2011. "Portfolio Substitution and the Revenue Cost of the Federal Income Tax Exemption for State and Local Government Bonds," National Tax Journal, National Tax Association;National Tax Journal, vol. 64(2), pages 591-613, June.
    • Handle: RePEc:ntj:journl:v:64:y:2011:i:2:p:591-613
    DOI: 10.17310/ntj.2011.2S.07
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    5. Gao Liu & Dwight V. Denison, 2014. "Indirect and Direct Subsidies for the Cost of Government Capital: Comparing Tax-Exempt Bonds and Build America Bonds," National Tax Journal, National Tax Association;National Tax Journal, vol. 67(3), pages 569-594, September.
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