Exclusion of interest on public purpose state and local bonds
Interest paid to holders of state and local government bonds is untaxed.
JCT line: "Exclusion of interest on public purpose State and local government bonds" — corporate ($5.1B) plus individual ($21.9B).
The exclusion is worth more the higher the holder's marginal rate, which is precisely why these bonds are held overwhelmingly by high-rate individuals, bond funds and insurers. Holding is the eligibility condition, so the benefit tracks investable assets directly.
Structural reading
An unusually clean illustration of a subsidy that leaks. The stated purpose is to lower borrowing costs for state and local governments, and it does — but only partly. Because tax-exempt yields settle wherever the marginal buyer requires, some of the federal revenue forgone is captured by bondholders rather than passed through to the issuer, and the size of that share is set by market conditions rather than by any provision of law. It is a subsidy whose division between intended and incidental beneficiary is not something Congress controls, which is a different failure mode from most items on this list.
Who gets it
The channels the benefit actually flows through, described by asset position, entity form and form of return. Never by named individuals.
Cost split by the concentration score. That score is a judgement rather than a published figure, so treat this as the scale of the split, not an audited allocation.
- High-marginal-rate bondholders
Tax-exempt yields price below taxable equivalents, so the exclusion is only worth holding for investors whose rate is high enough to make the lower yield attractive. The instrument self-selects its beneficiaries.
- Issuing governments, partially
Part of the subsidy passes through as lower borrowing costs for the issuer, but the split between issuer and bondholder is set by the market rather than by statute, so a share is retained by holders.
- Underwriters and bond funds
A permanently tax-favoured asset class sustains an intermediation industry whose fees are a benefit distinct from anything reaching either the issuer or the taxpayer.
Who pays
Federal taxpayers generally, who fund a subsidy to subnational borrowing.
This transfer follows a general pattern, asymmetric organisation, sustained expert attention, and scheduled expiry dates.
How rent-seeking works →Legislative history and accountability
Enacting statutes, major amendments, recorded votes with party breakdown, and live reform proposals.
Enabling legislation
- Revenue Act of 1913Oct 3, 1913
Exempted interest on state and local obligations from the outset of the federal income tax, originally on federalism grounds.
No separate recorded vote on this provision, it passed by voice, predates recorded electronic voting, or moved inside a larger package voted on as a whole.
Major amendment
- Tax Reform Act of 1986P.L. 99-514Oct 22, 1986
Drew the line between public purpose and private activity bonds and restricted the latter, after the exemption had been used extensively to finance private projects.
BipartisanEnacted by a Republican president and a divided Congress with broad support from both parties — the most bipartisan major tax reform of the modern era. No separate roll call on this provision is recorded here.
Sources and data freshness
Published within the last year. Figures marked unverified are seed estimates that have not been reconciled line-by-line against the primary source document. See the methodology for how each score is constructed.