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

James M. Poterba and Arturo Ramírez Verdugo

National Tax Journal, 2011, vol. 64, issue 2, 591-613

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income tax revenue that would be collected if the interest tax exemption for state and local government bonds were repealed or curtailed.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.

Date: 2011
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Persistent link: https://EconPapers.repec.org/RePEc:ntj:journl:v:64:y:2011:i:2:p:591-613

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