Paying for Planning

This report explains the economical use of debt instruments of the state and local governments being exempted from interest income earned on federal bonds from federal income tax. As public capital facilities provide services over a long period of time, it makes financial sense that they can be paid for over a long period of time; just like state and local governments may require short-term borrowing in a year of shortfall of revenue because they must plan their budget one to two years in advance. The exemption from federal income tax gives state and local governments an increased capacity of capital formation. These statutory subsidies are measured in yield spread or yield ratio and classified by maturity, type of security, use of proceeds, and type of activity.