Practical Applications How Do Municipal Bonds Behave without Tax Exemption?

Abstract

For years, experts have raised questions about the effectiveness of the municipal bond tax deduction. Those questions may arise again as the US Congress debates President Trump’s plan to overhaul the tax code.

When some state and local governments had difficulty accessing credit markets during the financial crisis, the US Congress authorized a program that allowed these entities to issue taxable Build American Bonds (BABs). These bonds were designed to entice investors with better yields than could be obtained with tax-exempt bonds.

How Do Municipal Bonds Behave Without Tax Exemption? takes a closer look at the impact that BABs had on the municipal bond market, including commentary on the yields that investors ultimately have received. Authors Rustin T. Yerkes and Sara Helms McCarty of Samford University and Lauren W. Bates of Highland Associates take a comprehensive approach to the question by examining approximately 100,000 different tax-exempt and taxable BAB issuances.