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Authoritative Reference METHODOLOGY • COVENANTS • PROOF

Institutional Methodology & Underwriting Dossier

This institutional model calculates the exact after-tax take-home return of U.S. Treasury bills, notes, and Treasury ETFs ($SGOV) versus commercial bank CDs and corporate bonds across federal and 50-state tax brackets under 31 U.S.C. § 3124.

1. Target Audience & Practical Application

How different financial market participants apply this quantitative model to real-world capital allocation:

Business Owners & Treasurers

Evaluate whether sweeping idle corporate cash into commercial checking CDs or state-tax-exempt short-term Treasuries delivers higher net cash yields after state corporate franchise taxes.

Financial Advisors

Demonstrate tax drag to clients in high-tax jurisdictions (California, New York, New Jersey, Oregon, Minnesota) when comparing Treasury yields to taxable bank certificates of deposit.

Macroeconomists & Analysts

Examine retail and institutional cash substitution effects across the short-end of the yield curve during shifts in monetary policy.

Home & Self-Help Investors

Avoid the retail trap of chasing high nominal bank CD promotional rates that end up yielding less after state and federal income taxes than liquid Treasury bills.

2. Tax-Equivalent Yield & Net Take-Home Formulas

1. Tax-Equivalent Yield (TEY) vs. Nominal Treasury Yield:
TEY = Treasury Nominal Yield / (1 - Marginal State Tax Rate)

2. Net After-Tax Take-Home Yields:
Net Treasury Yield = Treasury Yield × (1 - Federal Tax Rate)
Net Taxable Yield = Taxable CD Yield × [1 - (Federal Tax Rate + State Tax Rate)]

3. Statutory Authority & Critical Thresholds

Under 31 U.S.C. § 3124, obligations of the United States Government (including Treasury bills, notes, bonds, and Treasury-only ETFs like $SGOV) are immune from taxation by State and municipal authorities.

4. Frequently Asked Questions (FAQ)

What is a Tax-Equivalent Yield (TEY)?
The Tax-Equivalent Yield (TEY) is the pre-tax interest rate that a fully taxable investment (such as a commercial bank CD or corporate bond) must pay for its net after-tax return to equal that of a tax-exempt investment, such as state-tax-exempt U.S. Treasuries.
Are Treasury bills and SGOV completely exempt from state income tax?
Yes. Under federal statute 31 U.S.C. § 3124, direct obligations of the United States Government, including Treasury bills and pure 100% Treasury ETFs such as iShares 0-3 Month Treasury Bond ETF ($SGOV), are immune from all state and local income taxes.
How do bank CDs compare to Treasuries after taxes in California or New York?
In high-tax states like California (top bracket 13.3%) and New York City (combined state and local rate up to 14.78%), a 4.50% Treasury bill requires a commercial bank CD to pay over 5.20% to 5.28% just to break even after state taxes are deducted.
Does the federal government tax U.S. Treasury interest?
Yes. While U.S. Treasuries are protected from state and local taxes, all interest earned on Treasury bills, notes, and bonds is fully subject to federal ordinary income tax.