This paper addresses the long-standing “muni puzzle”, where the tax-adjusted municipal bond yield curve is significantly steeper than that of corporate bonds, with a spread exceeding 100 basis points at 30-year maturity. Previous explanations based on default risk and liquidity cannot fully resolve the puzzle. I propose that tax-induced issuance of longer-maturity bonds, along with liquidity premiums, fully explains the puzzle. Tax advantages lower borrowing costs, flatten the cost curve, and increase long-term issuance, raising yields at the long end of the yield curve. Using exogenous variations in tax-driven costs and yields, I estimate supply and demand elasticities, and the structurally estimated equilibrium yield matches observed yield spreads. Counterfactuals suggest that tax-induced supply maturity choice explains 75% of the puzzle, while liquidity accounts for 25%. The model offers insights into optimal government subsidies for municipal issuers.