Municipal bond funds experienced inflows throughout the second quarter of 2016, extending the inflow streak to 39 weeks as of quarter’s end. Overall, the muni market rallied during the three months ended June 30, 2016.

Investors, we believe, continued to be drawn to the relatively attractive levels of tax-free income that the muni market has been generating during the long-standing, low-interest-rate environment. The market for munis and for U.S. Treasuries was further helped by the uncertainty associated with Brexit, the referendum in which voters in the United Kingdom decided to exit the European Union.

Regardless of market and news developments, municipal bond funds have built-in tax benefits. The net investment income of national funds is exempt from federal income tax and the net investment income of single-state municipal bond funds is exempt from federal, state and, where applicable, local income taxes. (Investors should note that a portion of some funds’ distributions may be taxable and may increase alternative minimum tax (AMT) for investors subject to that tax. Additionally, distributions from net realized capital gains are taxable as capital gains.)

Oppenheimer Rochester manages 15 single-state funds in 12 states, of which 7 are open to new investors.1 Based on the tax-related trends identified by the National Association of State Budget Officers (NASBO) in its Spring 2016 Fiscal Survey of States, we believe it is likely that long-term investors will continue to see the appeal of the tax-free income our single-state funds generate.

According to the NASBO survey, fiscal 2017 budgets put forth by U.S. governors called for a net tax increase of $3.2 billion. In Pennsylvania, to focus on just one state where we offer a single-state fund, the governor sought tax increases totaling $2.7 billion.

The NASBO report also indicates that average general fund spending grew by 5.5% in fiscal 2016, while average general fund revenue rose just 2.8%. Eight states, mostly energy-producing ones, saw declines in their general fund revenues during fiscal 2016, and 19 states reported that their revenue collections for the year were lower than had been projected. The simplest way for a state to raise revenues, as residents of Illinois learned a number of years back, is to increase tax rates.

In our experience, elected officials sometimes have few good options when spending is rising at a faster clip than revenues, and according to NASBO, states currently expect that personal income tax (PIT) revenues will rise 3.9% in fiscal 2017.

Of course, a state’s ability to fund its high-priority initiatives depends on its ability to collect taxes, and states are notoriously adept when it comes to reaching into taxpayers’ pockets. Earlier this year, the Nelson A. Rockefeller Institute of Government, the public policy research arm of the State University of New York, reported on the forecasted PIT growth rates in 9 of the 12 states where Oppenheimer Rochester manages single-state funds. All 9 expect PIT revenues to grow in fiscal years 2016 and 2017.

All these trends suggest to us that the Rochester team’s single-state municipal bond funds will continue to hold interest for investors seeking to limit their state income tax payments.

Explore more in our interactive report about the 12 states in which Oppenheimer Rochester offers single-state funds, and follow @Rochesterfunds for more news and commentary.

1 The purchase and exchange of shares in Oppenheimer Rochester’s Arizona, Maryland, Massachusetts, Michigan, Minnesota, North Carolina, Ohio and Virginia funds was restricted to existing shareholders, subject to certain exceptions, as of the close of the New York Stock Exchange on March 24, 2016.