Municipal bonds represent borrowing by state or local governments to pay for special projects, such as highways or transit systems. The interest income earned from municipal bonds is exempt from Federal tax, and if issued in the investor's state of residence, from state and local taxes as well. The savings afforded to state and local issuers from this Federal tax exemption (and sometimes state and local tax exemptions) allows them to borrow more cheaply than other issuers. There is no single agency that handles municipal bond issues. However, there are brokerage firms that specialize in bringing out municipal bond issues.
States that do not use bond financing pay for projects either by accumulating sufficient funds before beginning the project or paying for the project from current revenues. Those states tend to have a more consistent level of revenues and disbursements than states which use bond financing.
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