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private activity bonds

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Part 1. Does restricting "private-activity" bonds, the solution set forth by the Federal tax reform act of 1986, make sense if applied by the state on local governments? What are the arguments for state restriction of these bonds?

Part 2. Do the arguments for restricting these private activity bonds by the state on local governments change in any way if a state has low debt and the local government has high debt?

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The answer to this question is very similar to what I answered previously. The principals are the same. There are also qualified private-activity bonds, which still can be treated as tax-exempt. We will assume that is not the case for this question.

Part 1 The interest from private activity bonds are not federal tax-exempt. So, they act like most private corporate bonds, exept there is the assumption that there is a tax base that would be able to pay off bonds if the local government had troubles. They would just raise taxes in their jurisdictions. However, there are still limits as local governments have limited geographic ...

Solution Summary

Restricting private activity bonds is assessed.