Bill's question, "I will pay income tax to the federal government, but not to my state and local government. But why? " To encourage investors, particularly in high state income tax rates, to purchase their debt and not municipal debt which is also tax free.
The benefit is two fold. You do not pay state and local taxes as the bond purchaser. The debt issuer is able to raise capital at a lower cost. There is a cost savings and benefit for local taxpayers to maintain and build local infrastructure. However, the IRS will penalize the issuer if they "invest" the bond proceeds - that is earn gains from interest arbitrage. That was not an issue for a long time with bank account interest rates so low. Now I have to actively monitor my bond proceed cash holdings. I work as a municipal CFO. There has been some recent chatter by federal legislatures about removing the tax free exemption for municipal bonds. If that were to happen, it would have a big negative impact on your local taxes.
Comments
Bill's question, "I will pay income tax to the federal government, but not to my state and local government. But why? " To encourage investors, particularly in high state income tax rates, to purchase their debt and not municipal debt which is also tax free.
Post: A Taxing Situation
Link to comment from February 13, 2025
A better simple answer is that US Treasury issued I bonds provide a competitive alternative to tax free issued municipal bonds.
Post: A Taxing Situation
Link to comment from February 12, 2025
The benefit is two fold. You do not pay state and local taxes as the bond purchaser. The debt issuer is able to raise capital at a lower cost. There is a cost savings and benefit for local taxpayers to maintain and build local infrastructure. However, the IRS will penalize the issuer if they "invest" the bond proceeds - that is earn gains from interest arbitrage. That was not an issue for a long time with bank account interest rates so low. Now I have to actively monitor my bond proceed cash holdings. I work as a municipal CFO. There has been some recent chatter by federal legislatures about removing the tax free exemption for municipal bonds. If that were to happen, it would have a big negative impact on your local taxes.
Post: A Taxing Situation
Link to comment from February 12, 2025