The effects of the alternative minimum tax on banks' municipal bond investments

Abstract

The replacement of the book-income adjustment (BIA) component of the corporate alternative minimum tax (AMT) formula with the adjusted current earnings (ACE) component in 1990 increased the effective tax rate on interest income from municipal bonds and lowered the yield on municipal bonds relative to taxable bonds. This study assesses the effects of the replacement of the BIA with the ACE on municipal bond holdings for a sample of 72 banks over the 1987–1993 period. Results show that banks that were likely to pay the AMT held significantly lower amounts of municipal bonds in the period following the enactment of the ACE adjustment than banks that were likely to pay the regular tax.

Citation

Musazi, B., Billings, B.A. and Hwang, A.L.J. (2002), "The effects of the alternative minimum tax on banks' municipal bond investments", Advances in Taxation (Advances in Taxation, Vol. 14), Emerald Group Publishing Limited, Leeds, pp. 209-243. https://doi.org/10.1016/S1058-7497(02)14012-9