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CRS – Private Activity Bonds: An Introduction – Private Activity Bonds: An Introduction June 9, 2006 – July 13, 2018

“The federal tax code classifies state and local bonds as either governmental bonds or private activity bonds. Governmental bonds are intended for governmental projects, and private activity bonds are for projects that primarily benefit private entities. Typically, the interest earned by holders of governmental bonds is exempt from federal income taxes. The federal tax code allows state and local governments to use tax-exempt bonds to finance certain projects that would be considered private activities. The private activities that can be financed with tax-exempt bonds are called “qualified private activities.” Congress uses an annual state volume cap to limit the amount of tax-exempt bond financing generally and restricts the types of qualified private activities that would qualify for tax-exempt financing to selected projects defined in the tax code. The economic rationale for the federal limitation on tax-exempt bonds for private activities stems from the inefficiency of the mechanism to subsidize private activity and the lack of congressional control of the subsidy absent a limitation. This report explains the rules governing qualified private activity bonds, describes the federal limitations on private activity bonds, lists the qualified private activities, and reports each state’s private activity bond volume cap. Since private activity bonds were defined in 1968, the number of eligible private activities has been gradually increased from 12 activities to 27. The state volume capacity limit has increased from $150 million and $50 per capita in 1986 to the greater of $311.38 million or $105 per capita in 2018. Because of the $311.38 million floor, many smaller states are allowed to issue relatively more private activity bonds (based on the level of state personal income) than larger states. Also, more recent additions to the list of qualified activities have been exempt from a state-by-state cap and subject to a national aggregate cap.”

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