An Analysis of Subsidy Plans to Support State and Local Borrowing

In this paper, a simple financial market model is developed and used to analyze three major proposals designed to subsidize state and local borrowing: (1) the establishment of a financial intermediary to borrow from the public and to relend these funds at subsidized rates to state and local governments; (2) the payment of a subsidy to those state and local governments which choose to issue taxable rather than tax-exempt instruments; (3) the payment of a subsidy to retirement funds — public or private — which choose to purchase tax-exempt municipal bonds. The principal conclusions are that if all of these proposals were to operate optimally, they would achieve substantially the same results for given subsidy payments and would be highly levered in terms of benefits conferred for the dollars spent.