Order Code RL30638
Tax-Exempt Bonds: A Description of
State and Local Government Debt
Updated March 26, 2008
Steven Maguire
Specialist in Public Finance
Government and Finance Division
Tax-Exempt Bonds: A Description of State and Local
Government Debt
Summary
This report provides information about state and local government debt. State
and local governments often issue debt instruments in exchange for the use of
individuals’ and businesses’ savings. This debt obligates state and local governments
to make interest payments for the use of these savings and to repay, at some time in
the future, the amount borrowed. State and local governments finance capital
facilities with debt rather than out of current tax revenue in order to match the time
pattern of benefits from these capital facilities with the time pattern of tax payments.
The federal government subsidizes the cost of most state and local debt by
excluding the interest income from federal income taxation. This tax exemption of
interest income is granted because it is believed that state and local capital facilities
will be under provided if state and local taxpayers have to pay the full cost.
State and local debt is issued as bonds, to be repaid over a period of time greater
than one year and perhaps exceeding 20 years, and as notes, to be repaid within one
year. General obligation bonds are secured by the promise to repay with general tax
revenue, and revenue bonds are secured with the promise to use the stream of
revenue generated by the facility built with the bond proceeds. Most debt is issued
to finance new capital facilities, but some is issued to refund a prior bond issue
(usually to take advantage of lower interest rates). Tax-exempt bonds issued for
some activities are classified as governmental bonds and can be issued without
federal constraint because most of the benefits from the capital facilities are enjoyed
by the general public. Many tax-exempt revenue bonds are issued for activities
Congress has classified as private because most of the benefits from the activities
appear to be enjoyed by private individuals and businesses. The annual volume of
a subset of these tax-exempt private-activity bonds is capped.
Arbitrage bonds devote a substantial share of the proceeds to the purchase of
assets with higher interest rates than that being paid on the tax-exempt bonds. Such
arbitrage bonds are not tax exempt because Congress does not want state and local
governments to issue tax-exempt bonds and use the proceeds to earn arbitrage profits.
The arbitrage profits could substitute for state and local taxes.
The major policy issue in this area is the effort to use tax-exempt bonds to
increase federal financial support for a variety of public facilities. Another policy
issue is whether constraints should be relaxed on the types of activities for which
state and local governments can issue tax-exempt debt. The extent to which the
current arbitrage bond rules prohibit what some consider legitimate state and local
financial behavior is a related area of dispute. The list of activities that classify taxexempt private-activity bonds — and whether they should be included in the volume
cap — is another area of controversy. This report will be updated as new data
become available.
Contents
What is Debt? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Why Do State and Local Governments Issue Debt? . . . . . . . . . . . . . . . . . . . . . . . 1
What Makes State and Local Debt Special? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
What Does Tax Exemption Cost the Federal Government? . . . . . . . . . . . . . . . . . 4
Why Does the Federal Government Subsidize State and Local Debt? . . . . . . . . . 5
Classifying State and Local Debt Instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Maturity: Short-Term vs. Long-Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Tax and Revenue Anticipation Notes . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Auction Rate Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Security: General Obligation, Revenue, and Lease Rental Bonds . . . . . . . . 7
Use of the Proceeds: New-issue vs. Refunding Bonds . . . . . . . . . . . . . . . . . 9
Public Purpose vs. Private Purpose . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Private Activities Eligible for Tax Exemption . . . . . . . . . . . . . . . . . . . . . . . 10
What Are Arbitrage Bonds? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
What Are Tax Credit Bonds? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Legislative Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Suggested Readings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
List of Tables
Table 1. Yield on Tax-Exempt and Corporate Bonds of Equivalent Risk,
the Yield Spread, and the Yield Ratio:1980 to 2007 . . . . . . . . . . . . . . . . . . . 3
Table 2. Tax Expenditure on the Outstanding Stock of Public Purpose
Tax-Exempt Bonds: 1994 to 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Table 3. Volume of State and Local Tax-Exempt Debt: 1980 to 2007 . . . . . . . . 6
Table 4. Volume of Long-Term Tax-Exempt Debt: General Obligation
(GO), Revenue, and Refunding Bonds, 1980 to 2007 . . . . . . . . . . . . . . . . . . 8
Table 5. Private-Activity Bond Volume by Type of Activity in
2005 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Table 6. New-Money, Long-Term Private-Activity Bond Volume as
Percent of Total Bond Volume, 1988 to 2005 . . . . . . . . . . . . . . . . . . . . . . . 11
Table 7. Federal Tax Expenditure for Selected Private Activities Financed
with Tax-Exempt Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Table 8. Comparison of Three Types of Bonds with a 6% After-Tax Yield . . . 17
Tax-Exempt Bonds: A Description of State
and Local Government Debt
What is Debt?
Individuals and businesses lend their accumulated savings to borrowers. In
exchange, borrowers give lenders a debt instrument. These debt instruments,
typically called bonds, represent a promise by borrowers to pay interest income to
lenders on the principal (the amount of money borrowed) until the principal is repaid
to the lenders. This principal, sometimes called the proceeds, generally is used to
finance the construction of capital facilities.
Why Do State and Local Governments Issue Debt?
Since public capital facilities provide services over a long period of time, it
makes financial and economic sense to pay for the facilities over a similarly long
period of time. This is particularly true for state and local governments. Their
taxpayers lay claim to the benefits from these facilities by dint of residency and
relinquish their claim to benefits when they move. Given the demands a marketoriented society places on labor mobility, taxpayers are reluctant to pay today for
state and local capital services to be received in the future. The rational response of
the state or local official concerned with satisfying the preferences of constituents is
to match the timing of the payments to the flow of services, precisely the function
served by long-term bond financing. An attempt to pay for capital facilities “up
front” is likely to result in a less than optimal rate of public capital formation.
State and local governments are also faced with the necessity of planning their
budget for the year (or in some cases for two years). This requires a balancing of
revenue forecasts against forecasts of the demand for services and spending. Not
infrequently, the inevitable unforeseen circumstances that undermine any forecast
cause a revenue shortfall, which must be financed with short-term borrowing, or
“notes.” In addition, even when the forecasts are met, the timing of expenditures
may precede the arrival of revenues, creating the necessity to borrow within an
otherwise balanced fiscal year. Finally, temporarily high interest rates that prevail
at the time bonds are issued to finance a capital project may induce short-term
borrowing in anticipation of a drop in rates.
Thus, state and local governments have valid reasons to borrow funds. In fact,
these reasons are so universally accepted that both taxpayers and the courts have
CRS-2
ignored the nineteenth century legacy of unrealistically restrictive constitutional and
statutory limitations on state and local borrowing.1
What Makes State and Local Debt Special?
The federal government has chosen to intervene in the public capital market by
granting the debt instruments of state and local governments a unique privilege —
the exemption of interest income earned on these bonds from federal income tax.
The tax exemption lowers the cost of capital for state and local governments, which
should then induce an increase in state and local capital formation. The lower cost
of capital arises because investors would be indifferent between taxable bonds (e.g.,
corporate bonds) that yield a 10% rate of return before taxes and tax-exempt bonds
of equivalent risk that yield a 6.5% return. The taxable bond interest earnings carry
a tax liability (35% of the interest income in most cases) making the after tax return
on the two bonds identical at 6.5%. Thus, state and local governments could raise
capital from investors at an interest cost 3.5 percentage points (350 basis points)
lower than a borrower issuing taxable debt.
Generally, the degree to which tax-exempt debt is favored is measured in two
ways. The yield spread is the difference between interest rate on corporate bonds and
the interest rate on municipal bonds of equivalent risk. Table 1 lists the average
yield on high-grade municipal bonds and AAA-rated corporate bonds from 1980 to
2007, and the corresponding yield spread. The spread grew to a high of 3.43% in
1980 and dropped to a low of 0.94% in 2003. The greater the yield spread, the
greater is the nominal savings to state and local governments as measured by the
interest rates they would have to pay if they financed with taxable debt. As the
spread approaches zero, state and local borrowing costs approach the level of taxable
bond interest rates.
Another measure, the yield ratio (which is an average rate on tax-exempt bonds
divided by an average rate on a corporate bond of like term and risk), adjusts the
spread for the level of interest rates. The lower the ratio, the greater the savings to
state and local governments relative to taxable debt. As the ratio approaches one, the
cost of tax-exempt state and local borrowing approaches that of taxable borrowing.
As shown in Table 1, the ratio was lowest in 1980 at 0.71 and reached a peak of 0.84
in 1982. For the last decade the ratio has been relatively stable.
These variations in the cost of state and local borrowing relative to the cost of
taxable borrowing depend upon the demand for and supply of both tax-exempt and
taxable bonds. Demand for tax-exempt bonds depends upon the number of investors,
their wealth, statutory tax rates, and alternative investment opportunities. Supply
depends upon the desire of the state and local sector for capital facilities and their
ability to engage in conduit financing (issuing state or local government bonds and
passing the proceeds through to businesses or individuals for their private use).
1
Dennis Zimmerman, “History of Municipal Bonds,” in his The Private Use of Tax-Exempt
Bonds: Controlling the Public Subsidy of Private Activity (Washington, The Urban Institute
Press, 1991), pp. 17-27.
CRS-3
Almost all of the factors which influence demand and supply are affected by federal
tax policy.
Table 1. Yield on Tax-Exempt and Corporate Bonds of
Equivalent Risk, the Yield Spread, and the Yield Ratio:
1980 to 2007
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
High Grade
Tax-Exempt
Yield
(%)
8.51
11.23
11.57
9.47
10.15
9.18
7.38
7.73
7.76
7.24
7.25
6.89
6.41
5.63
6.19
5.95
5.75
5.55
5.12
5.43
5.77
5.19
5.05
4.73
4.63
4.29
4.42
4.42
AAA Corporate
Yield
(%)
11.94
14.17
13.79
12.04
12.71
11.37
9.02
9.38
9.71
9.26
9.32
8.77
8.14
7.22
7.96
7.59
7.37
7.26
6.53
7.04
7.62
7.08
6.49
5.67
5.63
5.24
5.59
5.52
Yield Spread
(%)
3.43
2.94
2.22
2.57
2.56
2.19
1.64
1.65
1.95
2.02
2.07
1.88
1.73
1.59
1.77
1.64
1.62
1.71
1.41
1.61
1.85
1.89
1.44
0.94
1.00
0.95
1.17
1.10
Yield Ratio
(tax-exempt/
corporate)
0.71
0.79
0.84
0.79
0.80
0.81
0.82
0.82
0.80
0.78
0.78
0.79
0.79
0.78
0.78
0.78
0.78
0.76
0.78
0.77
0.76
0.73
0.78
0.83
0.82
0.82
0.79
0.80
Source: Council of Economic Advisors, Economic Report of the President, February 2008, Table
B-73.
CRS-4
What Does Tax Exemption Cost the
Federal Government?
The direct cost to the federal government of this interest exclusion is the
individual and corporate income tax revenue forgone. Consider a 35% marginal tax
rate corporate investor who purchases a 6.5% tax-exempt bond with principal of
$1,000 that is to be repaid after 20 years. Each year for 20 years this taxpayer
receives $65 in tax-exempt interest income. Each year the federal government
forgoes collecting $35 of revenue because the revenue loss is based upon the yield
the taxpayer forgoes. For example, if the investor had purchased a taxable bond
carrying a 10% interest rate, he would have received $100 in interest income and paid
$35 in income taxes on that income.2
The annual federal revenue loss (or tax expenditure) on the outstanding stock
of tax-exempt bonds is reported in the Analytical Perspectives section of the Budget
every year. The estimates for the last 14 years are displayed in Table 2.3 Because
they are based upon the outstanding stock of public-purpose tax-exempt bonds, it
takes time for some legislative changes to show up in these data. The amount of
forgone tax revenue from the exclusion of interest income on public-purpose taxexempt bonds is substantial, $23.5 billion in 2007.
Table 2. Tax Expenditure on the Outstanding Stock of
Public Purpose Tax-Exempt Bonds: 1994 to 2007
(in billions)
Year
1994
1995
1996
1997
1998
1999
2000
Tax Expenditure
$19.6
$20.4
$24.9
$19.9
$24.6
$27.5
$26.8
Year
2001
2002
2003
2004
2005
2006
2007
Tax Expenditure
$27.4
$29.9
$31.1
$26.2
$26.4
$23.0
$23.5
Source: Office of Management and Budget. Analytical Perspectives: Budget of the United States
Government, various years.
2
The decision about preferred alternatives is critical to estimates of the revenue loss from
tax-exempt bonds. An entire range of financial and real assets exists with different yields,
risk, and degree of preferential taxation. It is not true that the municipal bond purchaser’s
preferred alternative is always a taxable bond.
3
These estimates are derived by summing the revenue loss estimates for each activity listed
in the tax expenditures budget. Technically, this is incorrect because each activity’s revenue
loss is calculated in isolation, and there are interactive effects. Nonetheless, without an
estimate of the interactive effects’ impact on revenue loss, the summing employed here
provides the best available order of magnitude.
CRS-5
Why Does the Federal Government Subsidize
State and Local Debt?
When first introduced in 1913, the federal income tax excluded the interest
income earned by holders of the debt obligations of states and their political
subdivisions from taxable income. It was asserted by many that any taxation of this
interest income would be unconstitutional because the exemption was protected by
the Tenth Amendment and the doctrine of intergovernmental tax immunity. The U.S.
Supreme Court rejected this claim of constitutional protection in 1988 in South
Carolina v. Baker (485 U.S. 505, [1988]).
Although the legal basis for the subsidy is statutory rather than constitutional,
the policy reason for the subsidy is economic. Economic theory suggests that certain
types of goods and services will not be provided in the correct or “optimal” amounts
by the private sector because some of the benefits are consumed collectively, a street
light for example. The Nation’s welfare can be increased by public provision of
these goods and services, and some of these public goods and services are best
provided by state or local governments. However, some of the goods and services
provided by state or local governments benefit both residents, who pay taxes, and
nonresidents, who pay minimal if any taxes. Since state and local taxpayers are
likely to be unwilling to provide these services to nonresidents without
compensation, it is probable that state and local services will be under provided. In
theory, the cost reduction provided by the exemption of interest income compensates
state and local taxpayers for benefits provided to nonresidents and encourages these
governments to provide the optimal amount of public services.
Classifying State and Local Debt Instruments
State and local debt can be classified based on (1) the maturity (or term), which
State and Local Government Debt
January 9, 2015
(RL30638)
Summary
This report provides information about state and local government debt. State and local governments often issue debt instruments in exchange for the use of individuals' and businesses' savings. This debt obligates state and local governments to make interest payments for the use of these savings and to repay, at some time in the future, the amount borrowed. State and local governments finance capital facilities with debt rather than out of current tax revenue in order to match the time pattern of benefits from these capital facilities with the time pattern of tax payments.
The federal government subsidizes the cost of most state and local debt by excluding the interest income from federal income taxation. This tax exemption of interest income is granted because it is believed that state and local capital facilities will be under provided if state and local taxpayers have to pay the full cost. The federal government also provides a tax preference through tax credit bonds (TCBs). With TCBs, the federal government either provides investors with a federal tax credit in lieu of interest payments or a direct payment to the issuer. Qualified Zone Academy Bonds and Build America Bonds are examples. For more on TCBs, see CRS Report R40523, Tax Credit Bonds: Overview and Analysis, by [author name scrubbed].
State and local debt is issued as bonds, to be repaid over a period of time greater than one year and perhaps exceeding 20 years, and as notes, to be repaid within one year. General obligation bonds are secured by the promise to repay with general tax revenue, and revenue bonds are secured with the promise to use the stream of revenue generated by the facility built with the bond proceeds. Most debt is issued to finance new capital facilities, but some is issued to refund a prior bond issue (usually to take advantage of lower interest rates). Tax-exempt bonds issued for some activities are classified as governmental bonds and can be issued without federal constraint because most of the benefits from the capital facilities are enjoyed by the general public. Many tax-exempt revenue bonds are issued for activities Congress has classified as private because most of the benefits from the activities appear to be enjoyed by private individuals and businesses. The annual volume of a subset of these tax-exempt private-activity bonds is capped. For more on private activity bonds, see CRS Report RL31457, Private Activity Bonds: An Introduction, by [author name scrubbed].
Arbitrage bonds devote a substantial share of the proceeds to the purchase of assets with higher interest rates than that being paid on the tax-exempt bonds. Such arbitrage bonds are not tax exempt because Congress does not want state and local governments to issue tax-exempt bonds and use the proceeds to earn arbitrage profits. The arbitrage profits could substitute for state and local taxes.
One major policy issue in this area is tax reform proposals that would modify the tax treatment of state and local government bonds. Another policy issue is whether constraints should be relaxed on the types of activities, such as infrastructure spending, for which entities can issue tax-exempt debt. The list of activities that classify tax-exempt private-activity bonds—and whether they should be included in the volume cap—is another area of potential change or reform. This report will be updated as new data become available.
Tax-Exempt Bonds: A Description of State and Local Government Debt
What Is Debt?
Individuals and businesses lend their accumulated savings to borrowers. In exchange, borrowers give lenders a debt instrument. These debt instruments, typically called bonds, represent a promise by borrowers to pay interest income to lenders on the principal (the amount of money borrowed) until the principal is repaid to the lenders. This principal, sometimes called the proceeds, is typically used to finance the construction of capital facilities, but is also used for cash management purposes when revenue collections do not match spending needs during the fiscal year.
Why Do State and Local Governments Issue Debt?
Since public capital facilities provide services over a long period of time, it makes financial and economic sense to pay for the facilities over a similarly long period of time. This is particularly true for state and local governments. Their taxpayers lay claim to the benefits from these facilities by dint of residency and relinquish their claim to benefits when they move. Given the demands a market-oriented society places on labor mobility, taxpayers are reluctant to pay today for state and local capital services to be received in the future. The rational response of the state or local official concerned with satisfying the preferences of constituents is to match the timing of the payments to the flow of services, precisely the function served by long-term bond financing. An attempt to pay for capital facilities "up front" is likely to result in a less than optimal rate of public capital formation.
State and local governments are also faced with the necessity of planning their budget for the year (or in some cases for two years). This requires a balancing of revenue forecasts against forecasts of the demand for services and spending. Not infrequently, the inevitable unforeseen circumstances that undermine any forecast cause a revenue shortfall, which must be financed with short-term borrowing, or "notes." In addition, even when the forecasts are met, the timing of expenditures may precede the arrival of revenues, creating the necessity to borrow within an otherwise balanced fiscal year. Finally, temporarily high interest rates that prevail at the time bonds are issued to finance a capital project may induce short-term borrowing in anticipation of a drop in rates.
Thus, state and local governments have valid reasons to borrow funds. In fact, these reasons are so universally accepted that both taxpayers and the courts have ignored the 19th century legacy of unrealistically restrictive constitutional and statutory limitations on state and local borrowing.1
What Makes State and Local Debt Special?
The federal government has chosen to intervene in the public capital market by granting the debt instruments of state and local governments a unique privilege—the exemption of interest income earned on these bonds from federal income tax. The tax exemption lowers the cost of capital for state and local governments, which should then induce an increase in state and local capital formation. The lower cost of capital arises because investors would be indifferent between taxable bonds (e.g., corporate bonds) that yield a 10% rate of return before taxes and tax-exempt bonds of equivalent risk that yield a 6.5% return. The taxable bond interest earnings carry a tax liability (35% of the interest income in most cases), making the after-tax return on the two bonds identical at 6.5%. Thus, state and local governments could raise capital from investors at an interest cost 3.5 percentage points (350 basis points) lower than a borrower issuing taxable debt.
Generally, the degree to which tax-exempt debt is favored is measured in a variety of ways. Two are fairly common: the yield spread and the yield ratio. The yield spread is the difference between the interest rate on taxable bonds (corporate bonds or U.S. Treasury bonds) and the interest rate on tax-exempt municipal bonds of equivalent risk. Figure 1 displays the average yield on high-grade tax-exempt bonds and taxable bonds from 1980 to 2013 and the distance between them is the yield spread. Since 1980, the spread between tax-exempt and taxable bonds has declined as underlying interest rates have declined. The greater the yield spread, the greater are the nominal savings to state and local governments as measured by the interest rates they would have to pay if they financed with taxable debt.
Figure 1. Tax-Exempt and Taxable Bonds: Yield Spread and Yield Ratio, 1980 to 2013
|
Source: Council of Economic Advisors, Economic Report of the President, February 2014, Table B-17.
|
Another measure, the yield ratio (which is an average rate on tax-exempt bonds divided by an average rate on a taxable bond of like term and risk), adjusts the spread for the level of interest rates. A lower ratio implies a greater savings to state and local governments relative to taxable debt. As the ratio approaches one, however, tax-exempt borrowing approaches that of taxable borrowing. The ratio was lowest in 1980 and reached a peak in 2012 for Treasury bonds and in 2013 for corporate bonds. Since the financial crisis in 2007, the yield ratio of tax-exempt bonds to Treasury bonds has diverged significantly from the ratio of tax-exempt bonds to corporate bonds. Investors may be signaling that Treasury bonds and corporate bonds are no longer interchangeable investments.
These variations in the cost of state and local borrowing relative to the cost of taxable borrowing arise from changes in the demand for and supply of both tax-exempt and taxable bonds. Demand for tax-exempt bonds depends upon the number of investors, their wealth, statutory tax rates, and alternative investment opportunities. Supply depends upon the desire of the state and local sector for capital facilities and their ability to engage in conduit financing (issuing state or local government bonds and passing the proceeds through to businesses or individuals for their private use). Almost all of the factors which influence demand and supply are affected by federal tax policy and fiscal policy.
What Does Tax Exemption Cost the Federal Government?
The direct cost to the federal government of this interest exclusion is the individual and corporate income tax revenue forgone. Consider a 35% marginal tax rate corporate investor who purchases a 6.5% tax-exempt bond with principal of $1,000 that is to be repaid after 20 years. Each year for 20 years this taxpayer receives $65 in tax-exempt interest income. Each year the federal government forgoes collecting $35 of revenue because the revenue loss is based upon the yield the taxpayer forgoes. For example, if the investor had purchased a taxable bond carrying a 10% interest rate, he would have received $100 in interest income and paid $35 in income taxes on that income.2
The annual federal revenue loss (or tax expenditure) on the outstanding stock of tax-exempt bonds issued for public purposes is reported in the Analytical Perspectives section of the Budget every year. The estimates for the last 20 years are displayed in Table 1.3 Because they are based upon the outstanding stock of public-purpose tax-exempt bonds, it takes time for some legislative changes to show up in these data. The amount of forgone tax revenue from the exclusion of interest income on public-purpose tax-exempt bonds is substantial, $28.4 billion in 2013. Over the 2015 to 2019 budget window, the estimated loss of revenue is expected to be $213.8 billion, or the 12th-largest tax expenditure.4
Table 1. Tax Expenditure on the Outstanding Stock of Public Purpose Tax-Exempt Bonds: 1994 to 2013
(in billions)
|
Year
|
Tax Expenditure
|
Year
|
Tax Expenditure
|
|
1994
|
$19.6
|
2004
|
$26.2
|
|
1995
|
$20.4
|
2005
|
$26.4
|
|
1996
|
$24.9
|
2006
|
$23.0
|
|
1997
|
$19.9
|
2007
|
$23.5
|
|
1998
|
$24.6
|
2008
|
$24.6
|
|
1999
|
$27.5
|
2009
|
$23.0
|
|
2000
|
$26.8
|
2010
|
$30.4
|
|
2001
|
$27.4
|
2011
|
$26.2
|
|
2002
|
$29.9
|
2012
|
$26.0
|
|
2003
|
$31.1
|
2013
|
$28.4
|
Source: Office of Management and Budget. Analytical Perspectives: Budget of the United States Government, Table 14-1 (in budget for FY2015), various years.
Why Does the Federal Government Subsidize State and Local Debt?
When first introduced in 1913, the federal income tax excluded the interest income earned by holders of the debt obligations of states and their political subdivisions from taxable income. It was asserted by many that any taxation of this interest income would be unconstitutional because the exemption was protected by the Tenth Amendment and the doctrine of intergovernmental tax immunity. The U.S. Supreme Court rejected this claim of constitutional protection in 1988 in South Carolina v. Baker (485 U.S. 505, [1988]).
Although the legal basis for the subsidy is statutory rather than constitutional, the policy reason for the subsidy is economic. Economic theory suggests that certain types of goods and services will not be provided in the correct or "optimal" amounts by the private sector because some of the benefits are consumed collectively, a street light for example. The nation's welfare can be increased by public provision of these goods and services, and some of these public goods and services are best provided by state or local governments. Some of the goods and services provided by state or local governments, however, benefit both residents, who pay local taxes, and nonresidents, who pay minimal if any local taxes. Since state and local taxpayers are likely to be unwilling to provide these services to nonresidents without compensation, it is probable that state and local services will be under provided. In theory, the cost reduction provided by the exemption of interest income compensates state and local taxpayers for benefits provided to nonresidents. This encourages the governments to provide the optimal amount of public services.
Classifying State and Local Debt Instruments
State and local debt can be classified based on (1) the maturity (or term), which is the length of time before the principal is repaid; (2) the type of security, which is
the financial backing for the debt; (3) the use of the proceeds for either new facilities
or to refinance previously
- issued bonds; and (4) whether the type of activity being
financed has a public or a private purpose. Another important factor is the level
of risk.
Just about every bond issued by a state or local government is rated based on the
probability of default. The privately managed rating agencies incorporate all of the
above factors as well as the financial health of the entity issuing the bonds when
arriving upon a bond rating. The higher the default risk, the lower the rating.
Maturity: Short-Term vs. Long-Term
Tax and Revenue Anticipation Notes
.
State and local governments must
borrow money for long periods of time and for short periods of time. Long-term debt
instruments are usually referred to as bonds, and carry maturities in excess of one
year. Short-term debt instruments are usually referred to as notes, and carry
maturities of 12 months or less. If the notes are to be paid from specific taxes due
in the near future, they usually are called tax anticipation notes (TANs); if from
anticipated intergovernmental revenue, they are called revenue anticipation notes
(RANs). If the notes are to be paid from long-term borrowing (e.g., bonds), they are
CRS-6
called bond anticipation notes (BANs). Tax anticipation notes and revenue
anticipation notes are often grouped together and referred to as tax and revenue
anticipation notes (TRANs).
Table 3Figure 2 displays the volume of long-term and
shorttermshort-term borrowing since
19801992. Long-term borrowing dominates state and local debt
activity in most years, with the long-term share peaking in
1985 at over 902006 at 89.8% of this
market.
Table 3. Volume of State and Local Tax-Exempt Debt:
1980 to 2007
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Short-Term
(in millions)
$26,485
$34,443
$43,390
$35,849
$31,068
$20,809
$22,046
$20,518
$23,666
$29,596
$34,804
$44,800
$42,894
$47,354
$40,293
$38,346
$41,695
$46,434
$34,584
$36,511
$41,249
$56,610
$72,386
$69,771
$56,951
$50,544
$44,126
$57,999
Long-Term
(in millions)
$47,133
$46,134
$77,179
$83,348
$101,882
$206,991
$150,638
$105,027
$117,316
$125,005
$127,828
$172,443
$234,667
$292,249
$165,034
$159,983
$185,014
$220,672
$286,817
$227,741
$200,880
$288,083
$358,569
$383,498
$359,695
$408,193
$388,656
$429,727
Long-Term
Share of Total
64.0%
57.3%
64.0%
69.9%
76.6%
90.9%
87.2%
83.7%
83.2%
80.9%
78.6%
79.4%
84.5%
86.1%
80.4%
80.7%
81.6%
82.6%
89.2%
86.2%
83.0%
83.6%
83.2%
84.6%
86.3%
89.0%
89.8%
88.1%
Source: The Bond Buyer Yearbook, 2007 and earlier editions.
Auction Rate Securities. Auction Rate Securities (ARSs) are long-term
market.
Figure 2. Volume of State and Local Government Debt
|
Source: The Bond Buyer Yearbook, 2014.
|
Auction Rate Securities
Auction Rate Securities (ARSs) are long-term debt obligations with the unique feature of adjustable or variable interest rates.
5 In In
contrast to long-term, fixed rate securities, issuers go to auction periodically
(anywhere from every 7 to 35 days) to reset the interest rate on the debt outstanding.
The auction mechanism and interest rate parameters vary by issuer (and issue) though
most use what is termed a
“"Dutch auction
”" where each bidder submits a bid for the
amount they are willing to purchase at a given interest rate. All bids are ordered from
lowest interest rate to highest interest rate and the rate where the market clears,
e.g.,
CRS-7
that is, where all bonds would be purchased, establishes the new ARS rate. All bidders
receive that rate.
Unique Features of ARSs
.
ARSs typically have a
“"call option
”" where the
issuer can buy the ARS back at par (face value) at any scheduled auction and then
retire the debt. Most ARSs are insured by the issuer because they do not carry a
“put” "put" option that would allow bondholders to sell the bonds at a specified price to the
issuer or a designated third party. The bond insurance reduces risk and thus interest
rate rate, making the bonds less costly to issuers. For this reason, ARSs are
very sensitive to changes in credit ratings and normally require the highest
ratings (e.g. AAA/Aaa) to make them marketable. This is usually achieved with
bond insurance.
4
6
A Failed Auction
.
The existing holders of ARSs offer bids as well as new
bidders. If all bids of both existing bond holders and new participants fail to clear
the market, the auction is termed a
“"failed auction.
”" In this scenario, the original
agreement with bondholder stipulates a
“reservation”"reservation" interest rate the issuer must pay
in the event of a failed auction at least until the next successful auction. The
reservation rate is typically significantly higher than current market interest rates.
Because the rate is higher than market interest rates, issuers of ARSs wish to avoid
paying the reservation rate.
Growth of ARSs. The issuance of ARSs has grown considerably in the last
20 years
Growth and Decline of ARSs
The issuance of ARSs grew considerably from 1988 through 2007. In 1988, the Bond Buyer identified one ARS issue valued at $25 million;
none were issued in 1987.
57 In 2004, the peak year, 438 ARS bonds valued at $42.5
billion were issued.
The number of ARSs issues has since dropped to 322 and $38.7
billion in 2007.
No ARSs have been issued since 2007, roughly corresponding to the beginning of the financial crisis, when 322 were sold for a total value of $38.7 billion.
Security: General Obligation, Revenue,
and Lease Rental Bonds
Another important characteristic of tax-exempt bonds is the security provided
to the bondholder. General obligation (GO) bonds pledge the full faith and credit of
the issuing government. The issuing government makes an unconditional pledge to
use its powers of taxation to honor its liability for interest and principal repayment.
Revenue bonds, or non-guaranteed debt, pledge only the earnings from
revenueproducingrevenue-producing activities, most often the earnings from the facilities being financed with
the revenue bonds. Should these earnings prove to be inadequate to honor these
commitments, the issuing government is under no obligation to use its taxing powers
to finance the shortfall. Some revenue bonds are issued with credit enhancements
provided by insurance or bank letters of credit that guarantee payment upon such a
revenue shortfall.
4
Douglas Skarr, California Debt and Investment Advisory Commission, “Auction Rate
Securities,” Issue Brief, Aug. 2004, pp. 2-3.
5
The Bond Buyer 2007 Yearbook, SourceMedia Inc., New York, NY.
CRS-8
The first two columns of Table 4 display revenue shortfall.
Figure 3 displays the breakdown between long-term GO
and revenue bonds since
19801992. The long-term market has been and continues to be
dominated by revenue bonds, which are nonguaranteed debt instruments. During the
1960s (not shown in this table), revenue bonds constituted less than 40% of longterm bond volume; during the 1970s (also not shown) the revenue bond share crept
into the 50% to 65% range; and beginning in 1979 this share settled into the high 60s
and low 70s, achieving a high of 73.1% in 1988. The revenue bond share has
remained at or just below 70% from 1989 through 2007.
Table 4. Volume of Long-Term Tax-Exempt Debt: General
Obligation (GO), Revenue, and Refunding Bonds, 1980 to 2007
(in millions)
Year
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Long-Term Bond Volume
General
Revenue
Revenue
Obligation
Share
$16,347
$30,786
65.3%
$13,988
$32,146
69.7%
$23,276
$53,903
69.8%
$22,584
$60,764
72.9%
$27,508
$74,374
73.0%
$55,287
$148,994
72.9%
$45,555
$105,417
69.8%
$30,867
$74,656
70.7%
$31,502
$85,509
73.1%
$38,501
$86,504
69.2%
$40,303
$87,526
68.5%
$57,110
$115,334
66.9%
$80,479
$154,188
65.7%
$91,555
$200,694
68.7%
$55,767
$109,267
66.2%
$60,367
$99,615
62.3%
$64,344
$120,670
65.2%
$72,297
$148,201
67.2%
$93,644
$193,031
67.3%
$71,046
$156,695
68.8%
$66,573
$134,308
66.9%
$101,652
$186,431
64.7%
$125,675
$232,894
65.0%
$142,767
$240,731
62.8%
$129,527
$230,168
64.0%
$144,170
$264,023
64.7%
$114,858
$273,798
70.4%
$131,676
$298,051
69.4%
Refunding Bonds
Refunding
Amount
Share
$1,649
3.5%
$1,192
2.6%
$4,044
5.2%
$13,048
15.7%
$11,390
11.2%
$57,867
28.3%
$56,063
37.1%
$38,490
36.5%
$36,591
31.3%
$28,842
23.1%
$19,881
15.6%
$41,444
24.0%
$92,446
39.4%
$150,152
51.4%
$38,601
23.4%
$33,850
21.2%
$45,941
24.8%
$60,161
27.3%
$81,957
28.6%
$38,330
16.8%
$19,587
9.8%
$64,699
22.5%
$92,350
25.8%
$95,240
24.8%
$88,276
24.5%
$130,877
32.1%
$79,163
20.4%
$75,654
17.6%
Source: The Bond Buyer Yearbook, 2007 and earlier editions.
dominated by revenue bonds, which are nonguaranteed debt instruments. The revenue bond share has fluctuated between 61% and 72% from 1992 through 2013.
All tax-exempt interest income attributable to state and local governments does
not appear in the form of bonds. Governments may engage in installment purchase
contracts and finance leases for which the portion of the installment or lease payment
to a vendor is tax exempt. For example, computer equipment or road building
equipment could be leased from a vendor using a rental agreement or an installment
CRS-9
sales contract. Under this type of agreement, the monthly payments to the vendor are
large enough to cover the vendor
’'s interest expense on the funds borrowed to
purchase the equipment which was leased to the government. This portion that is
attributable to interest income is not included in the
vendorsvendor's taxable income. Such
transactions are often referred to as municipal leasing.
Figure 3. Volume of Long-Term Tax-Exempt Debt: General Obligation (GO) and Revenue Bonds, 1992 to 2013
(in millions)
|
Source: The Bond Buyer Yearbook, 2014.
|
Lease rental revenue bonds and certificates are variations on revenue bonds. An
authority or nonprofit corporation issues bonds, builds a facility with the proceeds,
and leases the facility to a municipality. Security for the bonds or certificates is
based on the lease payments. When the bonds are retired, the facility belongs to the
lessee (the municipality). An advantage to this type of arrangement is that many
states’ states' constitutional and statutory definitions do not consider this type of financing
to be debt because the lease payments are annual operating expenses based upon
appropriated monies.
The leasing technique has also been used to provide tax-exempt funds to
nonprofit organizations. A municipality issues the bonds for the construction of a
facility that is leased to a nonprofit hospital or university. Again, security for the
bonds is based on the lease payments.
Use of the Proceeds: New-
issueIssue vs. Refunding Bonds
Long-term tax-exempt bond issues also can be characterized by their status as
new issues or refunding issues. New issues represent bonds issued to finance new
capital facilities. Refundings usually are made to replace outstanding bonds with
bonds that carry lower interest rates or other favorable terms. As such, the refunding
bonds usually do not add to the stock of outstanding bonds or the capital stock. The
proceeds of the refunding bonds are used to pay off the remaining principal of the
original bond issue, which is retired. Advance refunding bonds, however, do add to
the outstanding stock of bonds without adding to the stock of capital. Advance
refunding bonds are issued prior to the date on which the original bonds are refunded,
so that for a period of time there are two bond issues outstanding to finance the same
capital facilities.
The last two columns of Table 4 show the dollar value of refunding issues and
their share of total long-term bond volume. The share capital facilities.
The volume of refunding shares varies widely, depending to
a great extent on changes in the relative magnitudes of taxable and tax-exempt
interest rates. Note that the 1993 increase in the top marginal individual income tax
rates may have increased the demand for tax-exempt bonds. Higher tax rates make
tax-exempt bonds more attractive relative to taxable bonds, all other things being
equal. The increased demand and accompanying lower interest rates may have
prompted state and local governments to replace outstanding issues with refunding
bonds that carried lower interest rates. In contrast, refundings dropped considerably
in 1999 and 2000. The decline could have been in response to higher interest rates
or to strong economic conditions in most states which minimized the need for debt
finance generally. The story is reversed from 2001 to 2003 as the economy slowed
and state budgets were strained by lower tax revenue collections. New issues in 2003
were more than double the amount of new issues in 2000. In 2005, GO bonds and
refunding bond volume peaked, likely reflecting the historically low interest rates on
tax-exempt debt
(see Table 1).
CRS-10
. The low rate environment since 2011 has also pushed up the share of refunding issues.
Public Purpose vs. Private Purpose
An important characteristic of tax-exempt bonds is the purpose or activity for
which the bonds are issued. Most of the tax legislation pertaining to tax-exempt
bonds over the last 30 years reflects an effort to restrict tax exemption to bonds
issued for activities that satisfy some broadly defined
“public”"public" purpose, that is, for
which federal taxpayers are likely to receive substantial benefits. Bonds are
considered to be for a public purpose if they satisfy either of two criteria: less than
10% of the proceeds are used directly or indirectly by a non-governmental entity; or
less than 10% of the bond proceeds are secured directly or indirectly by property used
in a trade or business. Bonds that satisfy either of these tests are termed
“governmental” "governmental" bonds and can be issued without federal limit. Bonds that fail both
of these tests are termed
“"private-activity
”" bonds (PABs) because they provide
significant benefits to private individuals or businesses. These projects are ineligible
for tax-exempt financing.
Activities which fail the two tests but are considered to provide both public and
private benefits have been termed eligible or
qualifiedqualified PABs. These selected
activities can be financed with tax-exempt bonds. Table
52 provides the dollar value
of new issues of tax-exempt private-activity bonds and their share of total
privateactivityprivate-activity volume capacity for
20052012 and
2006. Table 62013. Figure 4 provides historical data on the
portion of PAB volume to total bond volume.
Table 5
Table 2. Private-Activity Bond Volume by
Type of Activity in
2005 and 2006
Private Activity
Total Volume Capacity Available
New Volume Capacity
Carryforward from Previous Years
Carryforward to Next Year
Single-family Mortgage Revenue
Multi-family Housing
Student Loans
Exempt Facilities
Abandon Capacity
Industrial Development
Housing not Classified
Mortgage Credit Certificates
Other Activities
Issued in
(in millions)
2005
2006
$49,142
$48,675
$26,079
$26,438
$23,063
$23,277
$26,337
$22,638
$6,507
$10,093
$5,562
$6,252
$5,124
$4,018
$1,915
$2,605
$910
$1,417
$1,000
$1,195
$822
$562
$493
$510
$485
$284
Portion of Available
Capacity
2005
2006
100.0%
100.0%
53.1%
54.3%
46.9%
47.8%
53.6%
46.5%
13.2%
20.7%
11.3%
12.8%
10.4%
8.3%
3.9%
5.4%
1.9%
2.9%
2.0%
2.5%
1.7%
1.2%
1.0%
1.0%
1.0%
0.6%
Source: “State Allocations of Private-Activity Bonds in 2005,” The Bond Buyer, May 1, 2006; and
“State Allocations and Use of Private-Activity Bonds in 2006,” The Bond Buyer, June 25, 2007.
Private Activities Eligible for Tax Exemption
All tax-exempt private-activity bonds are subject to restrictions that do not apply
to governmental bonds, chief among them being no advance refundings and the
CRS-11
inclusion of the interest income in the alternative minimum income tax base. In
addition, the annual dollar value of all bonds issued for most of these activities by all
governmental units within a state is limited to the greater of $85 per resident or
$262.095 million in 2008. The cap has been adjusted for inflation since 2004. The
annual volume cap applies to the total of bonds issued primarily for but not limited
to multi- and single-family housing, industrial development, exempt facilities,6
student loans, and bond-financed takeovers of investor owned utilities (usually
electric utilities).
Table 6. New-Money, Long-Term Private-Activity Bond Volume
as Percent of Total Bond Volume, 1988 to 2005
Year
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Total Bond Volume
(in millions)
$119,367.8
$125,530.5
$128,045.8
$173,071.5
$235,413.1
$293,052.2
$165,101.3
$161,817.1
$185,207.4
$220,671.7
$286,816.9
$227,740.5
$200,880.0
$288,082.9
$358,568.6
$383,559.3
$359,717.2
$408,260.0
Private Activity Bond
(in millions)
$29,365.1
$27,650.2
$31,426.0
$27,809.6
$26,868.0
$21,230.6
$25,054.9
$27,942.7
$31,262.0
$37,550.0
$46,288.0
$47,408.0
$41,392.0
$49,356.0
$50,248.0
$45,633.0
$47,877.0
$54,691.0
Percent of Total
Volume
24.6%
22.0%
24.5%
16.1%
11.4%
7.2%
15.2%
17.3%
16.9%
17.0%
16.1%
20.8%
20.6%
17.1%
14.0%
11.9%
13.3%
13.4%
Sources: The 1988 to 1995 data are from Nutter, Sarah, “Tax-Exempt Private Activity Bonds, 19881995,” SOI Bulletin, Summer 1999; Belmonte, Cynthia, “Tax-Exempt Bonds, 2003-2004,: SOI
Bulletin, Fall 2006 ; and Belmonte, Cynthia, “Tax-Exempt Bonds, 2005, SOI Bulletin, Fall 2007.
2012 and 2013
Allocation in Billions
|
Percent of Capacity Available
|
|
Capacity Allocation
|
2012
|
2013
|
2012
|
2013
|
|
Total Volume Capacity Available
|
$79,295.00
|
$87,223.50
|
100.00%
|
100.00%
|
|
New Volume Capacity
|
$32,469.10
|
$32,748.30
|
40.95%
|
37.55%
|
|
Carry Forward from Previous Years
|
$50,611.10
|
$56,445.30
|
63.83%
|
64.71%
|
|
Total Carryforward to Next Year
|
$46,678.70
|
$60,220.00
|
58.87%
|
69.04%
|
|
Total PABs Issued
|
$11,088.80
|
$8,824.30
|
13.98%
|
10.12%
|
|
Single-family Mortgage Revenue
|
$2,654.40
|
$1,828.20
|
3.35%
|
2.10%
|
Multi-family Housinga
$5,003.90
|
$4,722.30
|
6.31%
|
5.41%
|
|
Mortgage Credit Certificates
|
$2,564.70
|
$3,441.20
|
3.23%
|
3.95%
|
|
Exempt Facilities
|
$7,391.30
|
$6,076.00
|
9.32%
|
6.97%
|
|
Other Activities
|
$30.10
|
$84.20
|
0.04%
|
0.10%
|
|
Student Loans
|
$772.00
|
$480.20
|
0.97%
|
0.55%
|
|
Industrial Development
|
$240.40
|
$355.80
|
0.30%
|
0.41%
|
|
Abandon Capacity
|
$6,604.80
|
$11,751.60
|
8.33%
|
13.47%
|
Source: "CDFA's 2013 Annual Volume Cap Report," July 2014; and "CDFA's 2012 Annual Volume Cap Data," July 2014. The data are available at http://www.cdfa.net/.
a. Multifamily housing bonds are an allowable use of exempt facility bonds and are also included in the "Exempt Facility" category.
Private Activities Eligible for Tax Exemption
All tax-exempt private-activity bonds are subject to restrictions that do not apply to governmental bonds, chief among them being no advance refundings and the inclusion of the interest income in the alternative minimum income tax base. In addition, the annual dollar value of all bonds issued for most of these activities by all governmental units within a state is limited to the greater of $100 per resident or $348.91 million in 2014.
Figure 4. New-Money and Long-Term Private-Activity Bond Volume, 1992 to 2011
Source: The 1992 to 1995 data are from Nutter, Sarah, "Tax-Exempt Private Activity Bonds, 1988-1995," SOI Bulletin, Summer 1999; Belmonte, Cynthia, "Tax-Exempt Bonds, 2003-2004," SOI Bulletin, Fall 2006; Belmonte, Cynthia, "Tax-Exempt Bonds, 2005," SOI Bulletin, Fall 2007; and for later years the IRS data are available at http://www.irs.ustreas.gov/taxstats/charitablestats/article/0,,id=97029,00.html. Total long-term bond volume data are from the
Bond Buyer Yearbook 2014.
The cap has been adjusted for inflation since 2004. The annual volume cap applies to the total of bonds issued primarily for but not limited to multi- and single-family housing, industrial development, exempt facilities,8 student loans, and bond-financed takeovers of investor-owned utilities (usually electric utilities).
Bond Buyer Yearbook 2007.
6
Exempt facilities subject to the volume cap are the following: mass commuting facilities,
water furnishing, sewage treatment, solid waste disposal, residential rental projects, electric
energy or gas furnishing, local district heating or cooling provision, and hazardous waste
disposal and 25% of high-speed rail facility bonds. 26 I.R.C. Section 141(e), Section
142(a), and 146(g).
CRS-12
Bonds issued for several activities classified as private are not subject to the
volume cap if the facilities are governmentally owned.
79 These activities are airports,
docks, and wharves; nonprofit organization facilities; high-speed inter-urban rail
facilities; and solid waste disposal facilities that produce electric energy. Table
7
3 below reports the estimated tax expenditure for selected private activities that qualify
for financing with tax-exempt debt.
Table 7
Recently, Congress has further expanded the types of private activities eligible for tax-exempt financing and has increased the capacity for selected activities and issuers. A brief description of legislation that Congress has enacted since 2001 follows below.
Table 3. Federal Tax Expenditure for Selected Private Activities
Financed with Tax-Exempt Bonds
2007 Tax
Expenditure
(in millions)
Percentage of
Total
$8,310
100.00%
$30
0.36%
Water, Sewerage, and Hazardous Waste Disposal
$370
4.45%
Small-Issues
$350
4.21%
Owner-Occupied Mortgage Subsidy
$900
10.83%
Rental Housing
$830
9.99%
Airports, Docks, and Similar Facilities
$850
10.23%
Student Loans
$440
5.29%
Private Nonprofit Educational Facilities
$1,750
21.06%
Hospital Construction
$2,760
33.21%
$30
0.36%
Private Activity
Total of Selected Activities
Energy Facilities
Veterans’ Housing
Source: Financed with Tax-Exempt Bonds
Private Activity
|
2013 Tax Expenditure(in millions)
Percentage of Total
|
|
Total of Selected Activities
|
$10,020
|
100.00%
|
|
Energy Facilities
|
$20
|
0.20%
|
|
Water, Sewerage, and Hazardous Waste Disposal
|
$450
|
4.49%
|
|
Small-Issues
|
$170
|
1.70%
|
|
Owner-Occupied Mortgage Subsidy
|
$1,230
|
12.28%
|
|
Rental Housing
|
$1,000
|
9.98%
|
|
Airports, Docks, and Similar Facilities
|
$740
|
7.39%
|
|
Student Loans
|
$510
|
5.09%
|
|
Private Nonprofit Educational Facilities
|
$2,240
|
22.36%
|
|
Hospital Construction
|
$3,430
|
34.23%
|
|
Veterans' Housing
|
$10
|
0.10%
|
|
GO Zone and GO Zone Mortgage
|
$220
|
2.20%
|
Source: Office of Management and Budget. Analytical Perspectives: Budget of the United States
Government Government, Fiscal Year
20092015, Table
19-1, pp. 287-291.
Recently, Congress has further expanded the types of private activities eligible
for tax-exempt financing and has increased the capacity for selected activities and
issuers. A brief description of legislation that Congress has enacted since 2001
follows below.
14-1, pp. 205-209.
Economic Growth and Tax Relief Reconciliation Act of 2001
.
As part
of the Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16
), ),
a new type of tax-exempt private-activity bond was created beginning on January 1,
2002.
810 The act expanded the definition of
“"an exempt facility bond
” to include bonds
7
This does not mean governmental ownership in the conventional sense. It simply means
that lease arrangements for private management and operation of bond-financed facilities
must be structured to deny accelerated depreciation benefits to the private operator, lease
length must conform to the facility’s expected service life, and any sale of the facility to the
private operator must be made at fair market value. 26 I.R.C. Section 146(g).
8
For a more extensive explanation of the tax exempt bond provisions in EGTRRA, see CRS
(continued...)
CRS-13
" to include bonds issued for qualified public educational facilities. Bonds issued for qualified
educational facilities are not counted against a state
’'s private-activity volume cap.
However, the qualified public educational facility bonds have their own volume
capacity limit equal to the greater of $10 multiplied by the
Statestate population or $5
million. Since nearly all states would be better off with the $10 per capita limit, the
potential new debt would have been approximately $2.8 billion in 2001 if the bonds
were available in 2001.
Job Creation and Worker Assistance Act of 2002
.
The JCWA 2002
( (P.L. 107-147) created the New York Liberty Zone (NYLZ) in the wake of the
September 11, 2001, terrorist attacks. The legislation included several tax benefits
for the NYLZ intended to foster economic revitalization within the NYLZ.
Specifically, the so-called
“"Liberty Bond
”" program allows New York State (in
conjunction and coordination with New York City) to issue up to $8 billion of
taxexempttax-exempt private-activity bonds for qualified facilities in the NYLZ. Qualified
facilities follow the exempt facility rules within
sectionSection 142 of the IRC. The original
deadline to issue the bonds was January 1, 2005, but was extended to January 1,
2010, by P.L. 108-311.
2014, by the American Taxpayer Relief Act (P.L. 112-240).
American Jobs Creation Act
.
In 2004, the American Jobs Creation Act
( (P.L. 108-357) created bonds for
“"qualified green building and sustainable design
projects.
”" The bonds are exempt from the state volume cap and are instead limited
to an aggregate of $2 billion for bonds issued between January 1, 2005
, and October
1, 2009.
The Safe, Accountable, Flexible, Efficient, Transportation Equity
Act of 2005
.
This legislation created a new type of tax-exempt private activity
bond for the construction of rail to highway (or highway to rail) transfer facilities.
The national limit is $15 billion and the bonds are not subject to state volume caps
for private activity bonds. The Secretary of Transportation allocates the bond
authority on a project-by-project basis.
Gulf Opportunity Zone Act of 2005
.
The hurricanes that struck the Gulf
region in late summer 2005
, prompted Congress to create a tax-advantaged economic
development zone intended to encourage investment and rebuilding in the Gulf
region. The Gulf Opportunity Zone
, (GOZ)
, is was comprised of the counties where the
Federal Emergency Management Agency (FEMA) declared the inhabitants to be
eligible for individual and public assistance. Based on proportion of state personal
income, the Katrina-affected portion of the GOZ represents approximately 73%
of
Louisiana’ of Louisiana's economy, 69% of Mississippi
’'s, and 18% of Alabama
’s.9
's.
Specifically, the
“"Gulf Opportunity Zone Act of 2005
”" (GOZA 2005, P.L.
109135) contains109-135) contained two provisions that
would expand the amount of private-activity bonds
8
(...continued)
Report RS20932 Tax-Exempt Bond Provisions in the “Economic Growth and Tax Relief
Reconciliation Act of 2001”, by Steven Maguire.
9
See CRS Report RL33154, The Impact of Hurricane Katrina on the State Budgets of
Alabama, Louisiana, and Mississippi, by Steven Maguire.
CRS-14
expanded the amount of private-activity bonds outstanding and language to relax the eligibility rules for mortgage revenue bonds.
The most significant is the provision
to increasethat increased the volume cap
(see Table 3) for
for private-activity bonds issued for Hurricane Katrina recovery in Alabama, Louisiana,
and Mississippi (identified as the Gulf Opportunity Zone, or
“"GO Zone
”). GOZA
2005 would add"). GOZA 2005 added $2,500 per person in the federally declared Katrina disaster areas in
which the residents
qualifyqualified for individual and public assistance.
The increased volume capacity
would addadded approximately $2.2 billion for
Alabama, $7.8 billion for Louisiana, and $4.8 billion for Mississippi in aggregate
over the next over five years. The legislation
defines “defined "qualified project costs
” that can be
financed with the bond proceeds" that are eligible for bond financing as (1) the cost of any qualified residential rental
project (26
sec. §142(d)); and (2) the cost of acquisition, construction, reconstruction,
and renovation of
— —(i) nonresidential real property (including fixed improvements
associated with such property) and (ii) public utility property (26
sec. §168(i)(10)), in
the GOZ. The additional capacity
wouldwas to have to
bebeen issued before January 1, 2011.
The provision is estimated to cost $1.556 billion over the 2006-2015 budget
window.10
The second provision
allowsallowed for advance refunding of certain tax-exempt bonds.
Under GOZA 2005, governmental bonds issued by Alabama, Louisiana, and
Mississippi
maycould be advance refunded an additional time and exempt facility
privateactivityprivate-activity bonds for airports, docks, and wharves once. Private-activity bonds are
otherwise not eligible for advance refunding (see earlier discussion of advance
refunding).
What Are Arbitrage Bonds?
Many individuals and businesses make money by engaging in arbitrage,
borrowing money at one interest rate and lending that borrowed money to others at
a higher interest rate. The difference between the rate at which one borrows and the
rate at which one lends produces arbitrage earnings. At its most basic level, it is the
primary activity of commercial banks — pay depositors an interest rate of “x” and
use the deposits to make commercial, automobile, and home loans at “x + y” interest
rate. In this context, arbitrage is a time-honored and appropriate financial market
activity.
That is not the case in the tax-exempt bond market. State and local governments
do not pay federal income tax, and absent federal constraint, have unlimited capacity
to issue debt at low interest rates and reinvest the bond proceeds in higher-yielding
taxable debt instruments, thereby earning arbitrage profits. Unchecked, state and
local governments could substitute arbitrage earnings for a substantial portion of their
own citizens’ tax effort.
10
The 10-year revenue loss estimates for GOZA 2005 are from the Joint Committee on
Taxation, Estimated Revenue Effects of H.R. 4440, the’Gulf Opportunity Tax Relief Act of
2005,’ as passed by the House of Representatives and the Senate on Dec. 16, 2005, JCX-8905, Dec. 20, 2005.
CRS-15
Congress has decided that such arbitrage should be limited, and that tax-exempt
bond proceeds must be used as quickly as possible to pay contractors for the
construction of the capital facilities for which the bonds were issued. Since it is
impossible for bonds to be issued precisely when contractors must be paid for their
expenses incurred in building public capital facilities, the tax law provides a
three-year period to spend an increasing share of the bond proceeds. Bond issues that
have unspent proceeds in excess of the allowed amounts during this three-year spenddown schedule must rebate any arbitrage earnings to the Department of the Treasury.
Bond issues are considered to be taxable arbitrage bonds if a governmental unit, in
violation of the arbitrage restriction in the tax code, invested a substantial portion of
the proceeds “to acquire higher yielding investments, or to replace funds which were
used directly or indirectly to acquire higher yielding investments.”11
What Are Tax Credit Bonds?
The 1997 Taxpayer Relief Act created a new category of tax preferred state and
local bonds, the qualified zone academy bond (QZAB) for renovating public school
facilities. Congress authorized QZAB debt of $400 million a year for 1998 through
2005 or $3.2 billion over the eight years. The annual limit is allocated among the
states in proportion to their share of all individuals below the poverty line.12
In 2005, Congress created two new types of tax credit bonds called Clean
Renewable Energy Bonds (CREBs) and Gulf Tax Credit Bonds (GTCBs). CREBs
were created with the enactment of the Energy Policy Act of 2005, P.L. 109-58.13
The bonds are intended to encourage the development of renewable energy sources.
As with QZABs, purchasers of CREBs receive federal tax credits in lieu of interest
payments, and the borrower only repays the principal. The total CREB bond volume
is limited to $800 million nationally, and the bonds must be issued before January 1,
2008. Only $500 million may be allocated to qualified projects of qualified
borrowers “...which are governmental bodies.”14 In addition, a third party must spend
at least 10% of the proceeds of the issue for the bond to qualify. The third party
would likely be a private business or individual that would benefit from the CREB
expenditures.
After Hurricane Katrina, Congress created yet another tax credit bond called
Gulf Tax Credit Bonds (GTCBs). These tax credit bonds are different from the
others in that the maturity is capped at two years, and only three states can issue a
limited amount: Alabama ($50 million), Louisiana ($200 million), and Mississippi
($100 million). The tax credit rate will approximate the interest rate on equivalent
two-year taxable securities. In addition, GTCBs require an equal match from the
issuing state. The proceeds from the bonds can be used to pay principal, interest, or
11
26 I.R.C. Section 148(a).
12
For a more detailed explanation of tax credit bonds or QZABs, see CRS Report RS20606,
Tax Credit Bonds: A Brief Explanation, by Steven Maguire.
13
119 Stat. 594.
14
119 Stat. 994.
CRS-16
premiums on state governmental bonds or make loans to any political subdivision of
the state to then be used to pay principal, interest, or premiums on the political
subdivision’s governmental bonds. The bonds can only be issued in 2006.
The subsidy for tax credit bonds is not provided in the form of the exemption
of interest income from federal income tax, as is true for tax-exempt bonds, including
bonds issued for public elementary and secondary education facilities. Rather, the
subsidy for them is a credit taken by eligible financial institutions against the federal
taxes they owe. The credit rate is calculated by the Treasury Department such that
the bonds can be issued without discount and without any interest cost to the issuer.
Unlike QZABs, where issuers are chosen by the state, issuers of CREBs are selected
by the Secretary of Treasury. For GTCBs, the governor of the issuing state
designates the use of the bond proceeds.
One way to think of this alternative subsidy is that financial institutions can be
induced to purchase these bonds if they receive the same after-tax return from the tax
credit bonds that they would from the tax exemption. The value of the credit must
be included in taxable income, but is then used to reduce regular or alternative
minimum tax liability. Assuming the taxpayer is subject to the regular corporate
income tax, the credit rate should equal the ratio of the purchaser’s forgone market
interest rate on tax-exempt bonds divided by one minus the corporate tax rate. For
example, if the tax-exempt interest rate is 6% and the corporate tax rate is 35%, the
credit rate would be equal to 0.06/(1-0.35), or about 9.2%. Thus, a financial
institution purchasing a $1,000 tax credit bond would receive a $92 tax credit for
each year it holds the bond.
The implicit subsidy is much greater for tax credit bonds than for tax-exempt
bonds. All of the interest costs for tax credit bonds are paid by the federal taxpayer.
For tax-exempt bonds, the federal taxpayer absorbs only the difference between the
taxable and tax-exempt interest rates. For example, if the taxable rate is 9.2% and
the tax-exempt rate is 6%, the non-tax credit bond receives a subsidy equal to 3.2
percentage points, the difference between 9.2% and 6%. The tax credit bond receives
a subsidy equal to all 9.2 percentage points.
The relationship between three types of bonds, all with the same after-tax yield
of 6%, is presented in Table 8. The most important column is the last, titled
“Implicit Subsidy to Borrower,” which is synonymous with the federal revenue loss
presented in Table 2 for all outstanding tax-exempt debt. The implicit subsidy is the
amount the borrower saves because of favorable federal tax treatment. In the case
of tax credit bonds, the subsidy is considerably greater than with traditional taxexempt bonds.
CRS-17
Table 8. Comparison of Three Types of Bonds
with a 6% After-Tax Yield
(numbers are in percentage of bond proceeds assuming a corporate
taxpayer is in the 35% marginal tax bracket)
Type of
Bond
Borrower
Pays
Lender
Receives
Taxes Paid
by Lender
Federal Tax
Revenue
from Bond
Implicit
Subsidy to
Borrower
Taxable
9.2
9.2
3.2
+3.2
0.0
Tax-exempt
6.0
6.0
0.0
0.0
3.2
Tax Credit
0.0
9.2a
3.2b
-6.0b
9.2
a. The lender is allowed to reduce its tax liability by the amount of the credit.
b. The federal government receives some additional tax revenue because the credit is included in
taxable income. However, the loss in revenue from the credit exceeds the revenue gain
producing the negative revenue effect.
Legislative Issues
Current legislative interest focuses on altering the tax treatment of state and
local debt to provide even greater financial support for a variety of public projects
such as education infrastructure, healthcare facilities, and rapid transit. There are
several ways the federal government can increase the federal subsidy to state and
local governments that issue tax-exempt bonds for these targeted purposes. One,
arbitrage rules could be loosened to allow the state or local government to earn more
investment income on unused bond proceeds. Less stringent arbitrage rules may also
reduce the compliance burden of some smaller government entities freeing more
funds for the project. Two, the federal government can change the rules for private
activities that qualify for tax-exempt financing. If more activities qualified to use
tax-exempt debt finance by virtue of any proposed rules changes, previous
congressional efforts to limit the use of tax-exempt debt for non-governmental
projects would be mitigated. Third, Congress could introduce a new type of tax
favored instrument, such as tax credit bonds, for a broader range of activities.
In addition to the three options highlighted above, many other methods can be
employed to enhance the federal subsidy for state and local government capital
formation. The desire to subsidize state and local capital formation, which in many
cases may be justified, must be weighed against the federal revenue loss and the
potential for misallocation of federal tax revenue.
CRS-18
Suggested Readings
Ballard, Frederic L., Jr. ABCs of Arbitrage: Tax Rules for Investment of Bond
Proceeds by Municipalities (Chicago: Urban, State, and Local Government Law
Section, American Bar Association, 1992).
Describes and explains arbitrage and the arbitrage tax rules that control state and
local investment practices.
Congressional Budget Office. The Tax-Exempt Financing of Student Loans
(Washington: GPO, August 1986).
Provides a legislative history of student loan bonds, describes the operation of
student loan authorities, estimates the costs of student loan bonds, and discusses
policy alternatives.
Congressional Budget Office. Small Issue Industrial Development Bonds
(Washington: GPO, September 1981).
Describes the growth, uses, and effects of small-issue IDBs, and discusses
policy alternatives.
U.S. Government Accountability Office. Home Ownership: Mortgage Bonds Are
Costly and Provide Little Assistance to Those in Need. GAO Report RCED-88111, March 1988.
Discusses the structure and operation of mortgage revenue bonds and analyzes
whether the bonds are successful in increasing home ownership for the target
population of lower-income households.
Hilhouse, Albert M. Municipal Bonds: A Century of Experience (New York:
Prentice-Hall, 1936).
The classic history of the use and development of municipal bonds from their
introduction in the 19th century.
Petersen, John E., and Ronald Forbes. Innovative Capital Financing (Chicago:
American Planning Association, 1985).
Provides discussion of the numerous variations on tax-exempt bonds that have
been developed to raise capital for the state and local sector, such as saleleasebacks, installment purchase contracts, etc.
Public Securities Association. Fundamentals of Municipal Bonds (New York:
Public Securities Association, 1987).
Describes the structure and functioning of the state and local debt markets.
CRS-19
U.S. Senate. Committee on the Budget. Tax Expenditures: Compendium of
Background Material on Individual Provisions. S.Prt. 106-65. 106th Congress,
2nd session, December 2000.
Provides description, revenue loss estimate, and economic analysis of the effects
of governmental bonds and each major category of private-activity bond.
Zimmerman, Dennis. The Private Use of Tax-Exempt Bonds: Controlling Public
Subsidy of Private Activity (Washington: The Urban Institute Press, 1991).
Provides institutional background: history, legal framework, and industry
characteristics. Provides discussion of tax-exempt bonds as an economic policy
tool affecting: intergovernmental fiscal relations, the federal budget deficit,
efficient resource allocation, and tax equity. Provides a history and economic
analysis of tax-exempt bond legislation from 1968 to 1989.
The Housing and Economic Recovery Act of 2008
In response to the housing crisis of 2008, Congress included two provisions in the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289) that were intended to assist the housing sector. First, HERA provided that interest on qualified private activity bonds issued for (1) qualified residential rental projects, (2) qualified mortgage bonds, and (3) qualified veterans' mortgage bonds would not be subject to the AMT. In addition, HERA also created an additional $11 billion of volume cap space for bonds issued for qualified mortgage bonds and qualified bonds for residential rental projects. The cap space was designated for 2008 but could have been carried forward through 2010.
The American Recovery and Reinvestment Act of 2009
In response to the financial crisis and economic recession, Congress included several bond-related provisions in the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5). The following three provisions were intended to make bond finance less expensive for the designated projects. One expanded the definition of qualified manufacturing facilities (under §144(a)(12)(C)) to include the creation and production of intangible property including patents, copyrights, formulae, etc. Before ARRA, only tangible property was eligible. The second created a new category of private activity bond called "recovery zone facility bonds." The bonds were to be used for investment in infrastructure, job training, education, and economic development in economically distressed areas. The bonds, which were subject to a separate national cap of $15 billion were allocated to the states based on the decline in employment in 2008. The bonds were to be issued in 2009 and 2010.
A third provision provided $2 billion for tribal governments to issue tax-exempt bonds for economic development purposes. The tax code currently allows tribal governments to issue debt for "essential government services" only. Many economic development projects would not qualify absent this ARRA provision.
What Are Arbitrage Bonds?
Many individuals and businesses make money by engaging in arbitrage, borrowing money at one interest rate and lending that borrowed money to others at a higher interest rate. The difference between the rate at which one borrows and the rate at which one lends produces arbitrage earnings. At its most basic level, it is the primary activity of commercial banks—pay depositors an interest rate of "x" and use the deposits to make commercial, automobile, and home loans at "x + y" interest rate. In this context, arbitrage is a time-honored and appropriate financial market activity.
That is not the case in the tax-exempt bond market. State and local governments do not pay federal income tax, and absent federal constraint, have unlimited capacity to issue debt at low interest rates and reinvest the bond proceeds in higher-yielding taxable debt instruments, thereby earning arbitrage profits. Unchecked, state and local governments could substitute arbitrage earnings for a substantial portion of their own citizens' tax effort.
Congress has decided that such arbitrage should be limited, and that tax-exempt bond proceeds must be used as quickly as possible to pay contractors for the construction of the capital facilities for which the bonds were issued. Since it is impossible for bonds to be issued precisely when contractors must be paid for their expenses incurred in building public capital facilities, the tax law provides a three-year period to spend an increasing share of the bond proceeds. Bond issues that have unspent proceeds in excess of the allowed amounts during this three-year spend-down schedule must rebate any arbitrage earnings to the Department of the Treasury. Bond issues are considered to be taxable arbitrage bonds if a governmental unit, in violation of the arbitrage restriction in the tax code, invested a substantial portion of the proceeds "to acquire higher yielding investments, or to replace funds which were used directly or indirectly to acquire higher yielding investments."11
What Are Tax Credit Bonds?
Tax Credit Bonds (TCBs) are a type of bond that offers an investor a federal tax credit or the issuer a direct payment. Build America Bonds (BABs), which are no longer issued, are a type of TCB that offers a direct payment to the issuer.
There are a variety of other TCBs in addition to BABs. Qualified zone academy bonds (QZABs), which were the first tax credit bonds, were introduced as part of the Taxpayer Relief Act of 1997 (P.L. 105-34) and were first issued in 1998. Clean renewable energy bonds (CREBs) were created by the Energy Policy Act of 2005 (P.L. 109-58) and "new" CREBs by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343). Gulf tax credit bonds (GTCBs) were created by the Gulf Opportunity Zone Act of 2005 (P.L. 109-135), but authority to issue GTCBs has expired. Qualified forestry conservation bonds (QFCBs) were created by the Food, Conservation, and Energy Act of 2008 (P.L. 110-246). Qualified energy conservation bonds (QECBs) and Midwest Disaster Bonds (MWDBs) were created by the Emergency Economic Stabilization Act of 2008 (P.L. 110-343).
The American Recovery and Reinvestment Act of 2009 (P.L. 111-5, ARRA) included several bond provisions that use a tax credit or issue direct payment. Specifically, ARRA created Qualified School Constructions Bonds (QSCBs), BABs, and Recovery Zone Economic Development Bonds (RZEDBs). Unlike other tax credit bonds, the interest rate on the BABs and RZEDBs is a rate agreed to by the issuer and investor and the issuers receive direct payments from the Treasury. In contrast, the Secretary of the Treasury sets the credit rate for the other TCBs. The authority to issue BABs and RZEDBs expired after 2010.
Each TCB, with the exception of BABs, is designated for a specific purpose, location, or project. Issuers use the proceeds for public school construction and renovation; clean renewable energy projects; refinancing of outstanding government debt in regions affected by natural disasters; conservation of forest land; investment in energy conservation; and for economic development purposes. All of the TCBs are temporary tax provisions.
The QZAB and QSCB credit rate is set at 100% and the "new CREB" and QECB credit rate is set at 70% of the interest cost. In contrast, the BAB tax credit rate is 35%. QZABs are typically extended as part of so-called "extenders" legislation. They expired after 2013 but were retroactively extended through 2014 by the Tax Increase Prevention Act of 2014 (P.L. 113-295).
Legislative Issues
Current legislative interest focuses on altering the tax treatment of state and local debt to provide a more economically efficient subsidy with a lower federal revenue cost.12 There are three primary types of proposals that include changes to state and local government bonds—capping the preference, eliminating the preference, and changing the preference to a direct issuer subsidy. These three types can be seen in the following proposals. The President's FY2015 budget proposal would include partial elimination of the tax preference by capping the preference at the 28% marginal tax rate. The Simpson-Bowles (SB) deficit reduction plan proposes complete elimination of the tax preference.13 The Congressional Budget Office (CBO) "Revenue Options" report proposes eliminating the tax exemption for new qualified private activity bonds which would generate a budget savings of $30 billion over the 2015 to 2024 budget window.14 The direction of broader tax reform will likely dictate which modifications, if any, are made to the tax treatment of state and local government debt.
Suggested Readings
Hilhouse, Albert M. Municipal Bonds: A Century of Experience (New York: Prentice-Hall, 1936).
The classic history of the use and development of municipal bonds from their introduction in the 19th century.
U.S. Senate. Committee on the Budget. Tax Expenditures: Compendium of Background Material on Individual Provisions. S.Prt. 112-45. 112th Congress, 2nd session, December 2012.
Provides description, revenue loss estimate, and economic analysis of the effects of governmental bonds and each major category of private-activity bond.
Zimmerman, Dennis. The Private Use of Tax-Exempt Bonds: Controlling Public Subsidy of Private Activity (Washington: The Urban Institute Press, 1991).
Provides institutional background: history, legal framework, and industry characteristics. Provides discussion of tax-exempt bonds as an economic policy tool affecting: intergovernmental fiscal relations, the federal budget deficit, efficient resource allocation, and tax equity. Provides a history and economic analysis of tax-exempt bond legislation from 1968 to 1989.
Footnotes
| 1.
|
[author name scrubbed], "History of Municipal Bonds," in his The Private Use of Tax-Exempt Bonds: Controlling the Public Subsidy of Private Activity (Washington, The Urban Institute Press, 1991), pp. 17-27.
|
| 2.
|
The decision about preferred alternatives is critical to estimates of the revenue loss from tax-exempt bonds. An entire range of financial and real assets exists with different yields, risk, and degree of preferential taxation. It is not true that the municipal bond purchaser's preferred alternative is always a taxable bond.
|
| 3.
|
These estimates are derived by summing the revenue loss estimates for each activity listed in the tax expenditures budget. Technically, this is incorrect because each activity's revenue loss is calculated in isolation, and there are interactive effects. Nonetheless, without an estimate of the interactive effects' impact on revenue loss, the summing employed here provides the best available order of magnitude.
|
| 4.
|
Office of Management and Budget. Analytical Perspectives: FY2015 Budget of the United States Government, Table 14-3.
|
| 5.
|
For more see CRS Report RL34672, Auction-Rate Securities, by [author name scrubbed].
|
| 6.
|
Douglas Skarr, California Debt and Investment Advisory Commission, "Auction Rate Securities," Issue Brief, Aug. 2004, pp. 2-3.
|
| 7.
|
The Bond Buyer 2007 Yearbook, SourceMedia Inc., New York, NY.
|
| 8.
|
Exempt facilities subject to the volume cap are the following: mass commuting facilities, water furnishing, sewage treatment, solid waste disposal, residential rental projects, electric energy or gas furnishing, local district heating or cooling provision, and hazardous waste disposal and 25% of high-speed rail facility bonds. 26 I.R.C. §141(e), §142(a), and §146(g).
|
| 9.
|
This does not mean governmental ownership in the conventional sense. It simply means that lease arrangements for private management and operation of bond-financed facilities must be structured to deny accelerated depreciation benefits to the private operator, lease length must conform to the facility's expected service life, and any sale of the facility to the private operator must be made at fair market value. 26 I.R.C. §146(g).
|
| 10.
|
For a more extensive explanation of the tax exempt bond provisions in EGTRRA, see CRS Report RS20932, Tax-Exempt Bond Provisions in the "Economic Growth and Tax Relief Reconciliation Act of 2001", by [author name scrubbed].
|
| 11.
|
26 I.R.C. §148(a).
|
| 12.
|
For more, see CRS Report R42396, The Impact of Budget Proposals on Tax-Exempt Bonds, by [author name scrubbed].
|
| 13.
|
The White House, The National Commission on Fiscal Responsibility and Reform, The Moment of Truth, December 2010, available at http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf.
|
| 14.
|
Congressional Budget Office, "Options for Reducing the Deficit: 2015 to 2024," November 2014, p. 134. Available at http://www.cbo.gov/budget-options/2014.
|