Issue Brief: Private Activity Bond Volume Caps

Updated April 2010


Tax-exempt financing is used by state and local governments to raise capital for public capital improvements and other projects provided that no more than 10% of the proceeds are used by private parties and no more than 10% of the debt service on the bonds is backed by private resources.

Certain types of projects that fail the 10% tests are nonetheless eligible for tax-exempt financing with private activity bonds, because Congress has determined that these projects serve important policy goals. These exempt facilities include a variety of infrastructure projects such as public transportation facilities, solid waste and hazardous waste disposal facilities, and water and sewerage facilities. Various conditions and limitations apply to the use of tax-exempt bonds for each of these exempt facilities.

A municipal security also is a private activity bond if, with certain exceptions, the amount of proceeds of the issue used to make loans to non-governmental borrowers exceeds the lesser of 5% of the proceeds or $5 million (the “private loan financing test”). Interest on private activity bonds is not excluded from gross income for federal income tax purposes unless the bonds fall within certain defined categories and most categories of qualified private activity bonds are subject to the alternative minimum tax. (MSRB Glossary of Municipal Securities Terms)

The federal tax code contains an additional group of programs for which private-activity bonds may be issued on a tax-exempt basis, provided the programs are qualified by meeting specific conditions and limitations. These include small-issue industrial development bonds (IDBs) and student loan bond programs.

In the late 1990s, a number of states began to exhaust their annual volume caps and were forced to postpone or cancel projects because tax-exempt financing could not be secured or to issue taxable bonds that are more expensive. This pushed Congress in 2000 to enact increases to the private activity volume cap and allow the amount to be indexed to inflation. The 2000 changes to the law state that the per capita increases must be in $5 increments before an adjustment can take place.

Recent Activities

In the Housing and Economic Recovery Act of 2008, Congress acted to permanently exempt all housing bonds from the private activity bond cap and allow mortgage revenue and rental property bonds an exemption for three years (until 2011).

The American Recovery and Reinvestment Tax Act of 2009 eliminated the application of AMT on private activity bonds issued in 2009 and 2010 and to refundings done in 2009 and 2010 (on bonds that were initially issued after Dec. 31, 2003). Additionally, the House of Representatives passed legislation in March 2010 (H.R. 4849) that would extend this provision through Dec. 31, 2011. The Senate has not yet acted on this legislation.

Currently, each state’s private-activity bond cap is set at $90 per capita or $273.775, whichever is greater. (See IRS web page,

If a state does not use the entire amount permitted under its cap, it can carry forward the difference for up to three years. Under current law, to qualify for the three-year carry-forward, a state must designate a specific issuer and specific type of function to be financed. If a designated facility cannot be financed during the subsequent three years due to changes in market conditions, the state cannot reallocate the bond authority to another type of project elsewhere in the state.

The bond authority can only be used by the specific issuer and only for the approved use. As a result, states have virtually no flexibility in reallocating scarce tax-exempt bond authority under the volume cap to react to changing market conditions.

Outlook for 2010

Efforts to increase or eliminate the private activity bond cap may be introduced in the 111th Congress and GFOA will closely monitor these activities.

Related GFOA Public Policy Statements



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