The interest earned on tax-exempt bonds issued in American Samoa is now exempt from state and local taxes even if the state or locality where an investor lives taxes interest on out-of-state bonds.
Legislation signed by President Bush Saturday exempts the interest on tax-exempt bonds issued by American Samoa from an investor's state, local, and territorial taxes, putting the debt on the same playing field as that issued by the District of Columbia, Puerto Rico, Guam, the Virgin Islands, and the Northern Mariana Islands.
Forty-one states tax interest earned on out-of-state municipal bond interest, while eight states and five territories exempt such interest. North Dakota exempts some out-of-state bond interest while taxing other such debt.
The legislation applies to all bonds issued after Sept. 16.
Until the law was signed, interest on American Samoa's tax-exempt bonds generally had been exempt only from federal taxes, although interest on some industrial development bonds issued by American Samoa were exempt from state, local and territorial taxes.
According to Thomson Financial, only four governmental and private-activity tax-exempt bonds totaling $38.58 million have been issued in American Samoa since 1962.
Jill Hershey, a vice president of legislative affairs at The Bond Market Association, said the change in law could lead to more issuance of tax-exempt bonds in American Samoa because it removes an obstacle for investors and creates uniformity across the national bond market.
"It will create a deeper pool and stronger national market for these types of bonds, and that certainly, we think, is a positive development," Hershey said. "People are looking at reasons to invest in tax-exempt bonds. This certainly removes an obstacle for them and maybe creates an incentive."
Hershey said it is hard to speculate how much more debt would be issued because of the law. "I would suspect but can't say for certain there would be a significant increase, but anytime that you remove obstacles for investors, that can only be seen as positive," she said.
The legislation would have a negligible impact on the federal budget, according to the Joint Tax Committee, and the Congressional Budget Office estimates that because American Samoa only has a few million dollars in bonds outstanding at any time, the preemption would not have a significant impact on state, local, or territorial governments.
The Senate approved the legislation on Sept. 29 by unanimous consent. The House approved identical legislation on Nov. 4 in a voice vote.
