State and Local Governments

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 preferences to bonds issued for activities that satisfy some broadly defined "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" 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 qualified PABs. These selected activities can be financed with tax exempt bonds. Table 2 provides the dollar value of new issues of tax-exempt private-activity bonds and their share of total private-activity volume capacity for 2014 and 2015. Figure 4 provides historical data on the portion of PAB volume to total bond volume.

Table 2. Private-Activity Bond Volume by Type of Activity in 2015 and 2016