Private Activity Bonds

The tax-exempt bonds issued for qualified private activities are limited by the type of activity financed and the volume of debt used for such activities. [...] After persistent challenges to the right of the federal government to restrict state and local government debt following the 1968 Act, the Supreme Court agreed to hear a case in 1988 that changed the nature of the federal tax treatment of state and local government debt. [...] In somewhat of a surprise to observers at the time, the Court went beyond the registration ruling and also held the following: The owners of state [and local] bonds have no constitutional entitlement not to pay taxes on income they earn from the bonds, and states have no constitutional entitlement to issue bonds paying lower interest rates than other issuers.5 The ruling confirmed that Congress ca [...] CRS-3 ! the bonds represent "an inefficient allocation of capital"; ! the bonds "increase the cost of financing traditional governmental activities"; ! the bonds allow "higher-income persons to avoid taxes by means of tax-exempt investments"; and ! the bonds contribute to "mounting [federal] revenue losses." The inefficient allocation of capital arises from the economic fact that additional invest [...] The Tax Reform Act of 1986 kept most of the activities listed in the 1968 Act and reorganized the private activity bond section of the federal tax code.