THE IMPACT OF STATE INCOME TAXES ON MUNICIPAL BORROWING COSTS

Abstract

This research examines whether differences in state personal income taxes affect relative state and local government borrowing costs. The results indicate that borrowing costs are lower in states that tax coupon interest on municipal securities issued outside the state at higher rates than interest on in-state securities. This discriminatory taxation effectively increases the relative demand for in-state municipals. The magnitude of the interest savings is directly related to the size of the tax differential.