Investors seeking the maximum tax benefit on their municipal bond income should move to Puerto Rico, because the commonwealth levies the highest personal and corporate income tax rates in the nation and exempt all state and local government bonds from those taxes, according to a Bond Buyer survey of state income taxes.
The survey found that 45 states, the District of Columbia, and Puerto Rico exempt all municipal bonds issued within the state from their personal and corporate income taxes. Thus residents of states with high income tax rates will find investments in local bonds or single-state municipal bond funds more attractive than residents living in states without income taxes.
Eleven of the 45 states also exempt municipal bonds issed outside the state. They are Alaska, Arizona, the District of Columbia, Indiana, Nevada, New Mexico, Puerto Rico, South Dakota, Utah, Washington, and Wyoming. However, residents of Alaska, Nevada, South Dakota, Washington, and Wyoming do not gain much from this exemption because the states levy no personal income taxes.
Two states, Illinois and Wisconsin, tax all municipal bond income, regardless of origin. Three states, Iowa, Kansas, and Oklahoma, exempt some, but not all, of the municipal bonds issued in-state.
Seven states do not levy income taxes, so their residents benefit only from the federal tax deduction when they buy municipal bonds.
Two states, Massachusetts and New Jersey, increased income tax rates for 1991. South Carolina and Puerto Rico reduced their maximum tax rates. New York State raised its minimum tax rate but reduced its maximum rate slightly.
These are some of the findings of a survey conducted by The Bond Buyer on state income tax rates for 1991 in the 50 states, the District of Columbia, and Puerto Rico. The table accompanying this article indicates whether bonds issued within or outside the state are subject to personal or corporate income taxes and lists lists the lowest and highest tax rates and the corresponding income brackets for personal and corporate income tax returns for the 1991 tax year.
Puerto Rico has the highest marginal tax rates on personal income in the nation, ranging from 9% to 36%. The commonwealth lowered the maximum rate from 38% a year ago.
Puerto Rico's corporate tax rates are also the highest in the country, at a flat 22%. The commonwealth also imposed a surtax ranging from 9% to 23%, and an additional tax of 5% on net income above $500,000, but the three corporate taxes together are limited to a maximum of 42% of the corporation's net income.
Connecticut is the second-best haven in the nation for municipal bonds, if they are issued in Connecticut. The state imposes a 14% maximum rate on personal income above $100,000, and it also has a flat 11.5% tax and a 20% surcharge on corporate income, although a proposal to eliminate the surcharge is pending in the state legislature. The state does tax interest from out-of-state bonds.
Other high-tax states include Massachusetts, with a flat 12% tax on all interest income; North Dakota, with a maximum rates of 12% on personal income and 10.5% on corporate income; Ohio, with a 12% maximum on personal income; Montana, with an 11% maximum on personal income; Hawaii and Oklahoma, both with 10% maximums on personal income; and Iowa, with maximum rates of 9.98% on personal income and 12% on corporate income.
At the other end of the scale, fivestates -- Nevada, South Dakota, Texas, Washington, and Wyoming -- do not impose any personal or corporate income taxes whatsoever. Alaska and Florida tax corporate income but not personal income, although Florida subjects out-of-state municipal bonds to a personal property tax. Tennessee does not have a personal income tax, but it does tax unearned income, including interest on out-of-state bonds.
Five states changed their income tax rates for the 1991 tax year. New Jersey raised its maximum rate on personal income to 7% from 3.5%. Massachusetts raised its flat rate on personal income to 6.2% from 5.95% but continued to subject all unearned income, excluding interest earned on Massachusetts bank accounts, to a flat 12% rate. New York raised its minimum rate on personal income to 4.3% from 4%, but lowered the maximum rate to 7.7% from 7.875%. Puerto Rico lowered the maximum rate on personal income to 36% from 38%. And South Carolina lowered its minimum rate to 2.5% from 2.75%.
Two other states made changes in their income tax brackets. Georgia lowered the minimum tax bracket to $750 from $1,000 and the maximum bracket to $7,000 from $10,000. Minnesota increased all of its tax brackets.
Delaware now taxes dividends on mutual funds that represent earnings on out-of-state municipal bonds.
Vermont recently enacted legislation to increase individual income tax rates in 1992 from the current flat 28% of the taxpayer's federal tax liability to a range of 28% to 34% of the federal tax liability.
A number of other states are considering changes to their state income tax structures. Pennsylvania Gov. Robert Casey proposed in his budget for fiscal 1991 and 1992 to raise the corporate income tax to 10.5% from 8.5%. Texas is considering a 5% maximum personal income tax and eliminating its corporate franchise tax in favor of a less regressive straight corporate tax.
