State and Local Governments

All tax-exempt private-activity bonds are subject to restrictions that do not apply to governmental bonds, chief among them was the now-repealed ability to issue advance refundings and the inclusion of the interest income in the alternative minimum income tax base.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 $105 per resident or $311.38 million in 2018. 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, student loans, and bond-financed takeovers of investor-owned utilities (usually electric utilities).

Figure 4. New-Money and Long-Term Private-Activity Bond Volume, 1992 to 2015

Bonds issued for several activities classified as private are not subject to the volume cap if the facilities are governmentally owned. 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 3 below reports the estimated tax expenditure for selected private activities that qualify for financing with tax-exempt debt. 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

Economic Growth and Tax Relief Reconciliation Act of 2001

As part of the Economic Growth and Tax Relief Reconciliation Act of 2001, a new type of tax-exempt private-activity bond was created beginning on January 1, 2002. The act expanded the definition of "an exempt facility bond" 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 state population or $5 million.

Job Creation and Worker Assistance Act of 2002

The Job Creation and Worker Assistance Act of 2002 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 tax-exempt private activity bonds for qualified facilities in the NYLZ. Qualified facilities follow the exempt facility rules within Section 142 of the IRC. The original deadline to issue the bonds was January 1, 2005, but was extended to January 1, 2014, by the American Taxpayer Relief Act.

American Jobs Creation Act

In 2004, the American Jobs Creation Act 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) 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's economy, 69% of Mississippi's, and 18% of Alabama's.

Specifically, the "Gulf Opportunity Zone Act of 2005" contained two provisions that 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 that increased the volume cap 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 added $2,500 per person in the federally declared Katrina disaster areas in which the residents qualified for individual and public assistance.

The increased volume capacity added approximately $2.2 billion for Alabama, $7.8 billion for Louisiana, and $4.8 billion for Mississippi in aggregate over five years. The legislation defined "qualified project costs" that are eligible for bond financing as (1) the cost of any qualified residential rental project (26 §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 §168(i)(10)), in the GOZ. The additional capacity was to have been issued before January 1, 2011.

The second provision allowed for advance refunding of certain tax-exempt bonds. Under GOZA 2005, governmental bonds issued by Alabama, Louisiana, and Mississippi could be advance refunded an additional time and exempt facility private-activity bonds for airports, docks, and wharves once. Private-activity bonds are otherwise not eligible for advance refunding (see earlier discussion of advance refunding).

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 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. 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 eligible 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 have qualified absent this ARRA provision.