Taxing Municipal Bond Income

Taxing Municipal Bond Income by Lyle C. Fitch addresses one of the most contested questions in American fiscal history: whether interest from state and local government bonds should remain exempt from federal income taxation. Tracing the debate from its origins in the late nineteenth century through the Pollock decisions and the ratification of the Sixteenth Amendment, Fitch shows how this exemption, though modest as a source of federal revenue, became a symbolic battleground over issues of equity, federalism, and the proper role of government. While critics denounce the exemption as a loophole that weakens the progressive tax structure and encourages uneconomic borrowing, defenders argue that eliminating it would raise the cost of local government and compromise financial independence at the state and municipal level. Framing the exemption as more than a technical matter, Fitch situates it within broader conflicts over centralized versus decentralized government and public versus private enterprise. He reviews past legislative battles, particularly the Roosevelt administration’s failed campaign of the 1930s and early 1940s, and considers why efforts at outright abolition repeatedly faltered. The study is structured in three parts: the first examines market dynamics and the relative advantages of tax-exempt bonds for investors and issuers; the second evaluates the fairness and efficiency of the exemption within the fiscal system; and the third explores the technical and political feasibility of taxing both outstanding and future securities. In presenting alternative policy approaches, Fitch provides both a comprehensive analysis of the exemption’s economic impact and a practical framework for legislators seeking reform. This title is part of UC Press's Voices Revived program, which commemorates University of California Press’s mission to seek out and cultivate the brightest minds and give them voice, reach, and impact. Drawing on a backlist dating to 1893, Voices Revived makes high-quality, peer-reviewed scholarship accessible once again using print-on-demand technology. This title was originally published in 1950.