Tax-Exempt Governmental Bonds, 1991-1995.
Since the inception of the modern-day Federal income tax in 1913, an exclusion from income subject to tax has been provided for interest received by holders of debt obligations (i.e., bonds) of States and their political subdivisions . This provision, which is in section 103 of the Internal Revenue Code of 1986, currently disallows the application of this general exclusion for "private activity bonds" that are not "qualified bonds," and for "arbitrage bonds."
The restrictions on the application of the general interest exclusion for State and local debt obligations began in 1968 with the passage of the Revenue and Expenditure Control Act (Public Law 90-364). In general, the restrictions are intended to limit the use of the exclusion provision in instances where the bond proceeds are not used for a public purpose or the issuers are exploiting arbitrage opportunities. The interest exclusion for arbitrage bonds, which are bonds whose proceeds are used to acquire higher-yielding investments, was initially eliminated in 1969 .
The Tax Reform Act of 1986 included further restrictions on arbitrage and a new restriction on advance refundings. New tax-exempt governmental bonds were limited to one advance refunding. In addition, rebate requirements, which generally require arbitrage profits on tax-exempt bonds to be rebated to the Federal Government, were expanded to include nearly all tax-exempt bonds. Exceptions to the rebate requirement are available for bond issues whose proceeds are invested in higher-yielding investments for a temporary period (generally less than 6 months) and if a minor portion of the bond proceeds are invested in higher yielding investments. Exceptions are also available for certain small issues and for bonds used to finance construction projects, as long as the proceeds are spent in a timely manner.
Long-Term Tax-Exempt Bonds
Tax-exempt bonds issued by State and local governmental units are generally classified as either governmental bonds or private activity bonds. For the period 1991 through 1995, State and local governmental units issued over $1.0 trillion of long-term tax-exempt bonds (Figure A). The majority of these bonds were tax-exempt governmental bonds ($719.2 billion). Tax-exempt private activity bonds accounted for the remaining $291.3 billion of the total. During this period, the combined volume of long-term tax-exempt bonds peaked at $285.6 billion for 1993 before falling to $152.6 billion for 1995.
[Figure A ILLUSTRATION OMITTED]
Other publicly available data on the volume of tax-exempt bond issues report statistics that vary slightly from the amounts reported in this article. U.S. Census Bureau statistics also report over $1.0 trillion of long-term tax-exempt bonds issued over the 1991-1995 period; however, the amounts reported for each year do vary from statistics reported in this article.
The data shown in this article do not include governmental bond issues reported to the Internal Revenue Service using Form 8038GC, Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales. Governments that issued one or more issues during a year that totaled $100,000 or less use this form. During 1991, 10,024 of these forms were processed. The reported volume was $518 million, of which $69 million were for refunding purposes. Evidence from this 1 year suggests that the data reported in this article fail to reflect only a relatively small volume of issues by not including the volume reported on Form 8038GC.
Each year, the U.S. Office of Management and Budget publishes Treasury Department estimates of the revenue losses associated with various income tax exclusions, deductions, credits, and special tax rates. For 1995, the total revenue loss to the U.S. Treasury associated with the interest exclusion on outstanding tax-exempt bonds issued by State and local governmental units was estimated to be $20.3 million . The estimated revenue loss has risen to $35.9 million for 2000 . The emphasis of the remainder of this article is on tax-exempt governmental bond data for the period 1991 through 1995, with particular emphasis on 1995 .
Tax-Exempt Governmental Bonds
As shown in Figure B, the volume of short- and long-term tax-exempt governmental bonds issued by State and local governmental units increased from $172.6 billion for 1991 to a high of $266.1 billion for 1993. Following 1993, the volume steadily declined each year, reaching $140.0 billion for 1995. Across this time period, new bond issues ranged from a low of $103.6 billion for 1995 to a high of $128.3 billion for 1992.
[Figure B ILLUSTRATION OMITTED]
Refunding issues increased substantially through 1993, peaking at $150.1 billion for that year, before falling to $36.4 billion for 1995. Refunding issues tend to peak when interest rates decline. State and local bond interest rates peaked during the early eighties, reaching an annual average rate of 11.7 percent for 1982, and then fell to an annual average rate of 7.7 percent for 1988, before reaching a low of 5.6 percent for 1993 . Many State and local bonds are issued with call provisions that prevent the issuer from retiring the bonds prior to 10 years from the date of issue. Call provisions allow the issuer of the bond to retire all or a portion of the bonds at a stated price, usually at par or at a small premium above par, prior to the stated maturity date . The data suggest that issuers of State and local bonds did indeed exercise call provisions, retiring outstanding high-interest bonds with the proceeds of new lower-interest bonds in so-called "current refundings" and "advance refundings." Governmental bonds issued after 1986 are limited to one advance refunding, with a transition rule that allowed bonds issued before the effective date of the Tax Reform Act of 1986 to be refunded twice (once if they had already had one or more advance refundings).
For the 1991-1995 period, three-fourths of the amount of bond issues were long-term in nature (Table 1). Short-term tax-exempt governmental bonds are issued less frequently, in part, because governmental bonds are generally issued to fund long-term projects. Of the $140.0 billion of tax-exempt governmental bonds issued for 1995, nearly $101.2 billion were long-term issues. More than two-thirds (68.1 percent) of the total volume of long-term bond issues were new money bond issues, while the remainder were refunding bond issues.
[TABULAR DATA 1 NOT REPRODUCIBLE IN ASCII]
Uses of Long-Term Tax-Exempt Governmental Bonds Proceeds
For 1991 through 1995, the volume of long-term tax-exempt governmental bonds ranged between $101.2 billion (for 1995) and $219.0 billion (for 1993). Nearly two-thirds of bonds issued during this period were used for five purposes: education (22.9 percent), utilities (17.3 percent), transportation (11.6 percent), environment (9.1 percent), and public safety (3.5 percent) (Figure C and Table 2). More than one-fourth of the $376.3 billion of new money issues of long-term tax-exempt governmental bonds during this period was for education. For 1995, education bonds comprised 32.1 percent of the $69.0 billion of new money long-term tax-exempt governmental bonds issued.
[Figure C ILLUSTRATION OMITTED]
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In many instances, a portion of the issue price (i.e., proceeds of the bonds) is used to fund various fees and reserve accounts and to refund prior bond issues (Table 3). For 1995, nearly $101.2 billion of long-term tax-exempt governmental bonds were issued. Issuers used $1.1 billion of bond proceeds to pay issuance costs, $0.3 billion to pay credit enhancement fees, and allocated $1.3 billion to reserve funds for these bond issues. Issuers also used $31.5 billion of the proceeds to refund prior bond issues. Approximately $67.0 billion were available to use for allowable purposes after paying for fees, reserves, and refunding.
[TABULAR DATA 3 NOT REPRODUCIBLE IN ASCII]
New Money Issues of Long-Term Tax-Exempt Governmental Bonds
For 1995, a total of 11,761 new long-term tax-exempt governmental bond issues was reported with proceeds totaling $69.0 billion (Table 4). For 90 percent of the bond issues, the dollar volume per bond issue was under $10 million. These bonds aggregated to $15.5 billion, slightly more than one-fifth of the total. The larger dollar volume issues were fewer in number but accounted for most of the total proceeds. Bond issues of between $10 million and $75 million (987 issues) raised approximately $21.9 billion, while 193 bond issues of $75 million or more raised $31.6 billion.
[TABULAR DATA 4 NOT REPRODUCIBLE IN ASCII]
As shown in Figure C, new money issues of long-term tax-exempt governmental bonds reached a peak of $80.3 billion for 1994 before declining to $69.0 billion for 1995. Overall, bonds issued for educational purposes accounted for more than one-fourth of the $376.3 billion of new long-term tax-exempt governmental bonds issued during the 1991-1995 period. Bonds, whose proceeds were used to fund transportation (12.2 percent), utilities (10.5 percent), environment (9.3 percent), and public safety (4.6 percent) were the other primary bond types issued during this period. For 1995, the primary uses of the $69.0 billion of new bonds were to finance education (32.1 percent), transportation (11.8 percent), utilities (10.3 percent), environment (8.8 percent) and public safety (4.7 percent).
New Money Issues of Long-Term Tax-Exempt Governmental Bonds by State
The volume of new long-term tax-exempt governmental bond issues varied among the States (Tables 5 and 6). About half of the $376.3 billion of bonds issued during the period 1991 through 1995 was issued in the following six States: California (17.9 percent), New York (10.4 percent), Texas (6.2 percent), Illinois (5.5 percent), Florida (5.5 percent), and Pennsylvania (4.1 percent). Bonds issued in New Jersey (2.9 percent), Washington (2.9 percent), Michigan (2.9 percent), Ohio (2.6 percent), Georgia (2.4 percent), Massachusetts (2.3 percent), and Virginia (2.2 percent) accounted for an additional $68.7 billion of the total (Figure D).
[Figure D ILLUSTRATION OMITTED]
[TABULAR DATA 5-6 NOT REPRODUCIBLE IN ASCII]
For 1995, more than two-fifths ($29.1 billion) of the $69.0 billion of new long-term tax-exempt governmental bonds were issued in the following States: California (12.7 percent), New York (9.7 percent), Texas (7.9 percent), Florida (6.4 percent), and Illinois (5.5 percent). However, on a per capita basis, these States did not account for the highest amounts of new long-term tax-exempt governmental bonds. At the aggregate level, all States (excluding U.S. possessions) issued $258 of new long-term tax-exempt governmental bonds per capita (Figure E). Alaska ($466), Nevada ($454), Hawaii ($436), Connecticut ($431), and Minnesota ($380) accounted for the largest amounts of new long-term tax-exempt governmental bonds on a per capita basis. In contrast, Montana, Wyoming, and West Virginia accounted for the smallest amounts of new long-term tax-exempt governmental bonds on both total volume and per capita bases. On a per capita basis, these States accounted for the following amounts: Montana ($84), Wyoming ($48), and West Virginia ($44).
Figure E Per Capita Amounts of New Money Long-Term Tax-Exempt Governmental Bonds by State, 1995
[Money amounts are in millions of dollars, except where otherwise indicated]
Per capita amount Total Population of bonds (in (whole State Number Amount millions) dollars) (1) (2) (3) (4) All States(1) 11,735 67,917 262.8 258 Alabama 184 593 4.3 139 Alaska 28 280 0.6 466 Arizona 201 1,295 4.3 301 Arkansas 214 302 2.5 122 California 933 8,754 31.5 278 Colorado 160 723 3.7 193 Connecticut 99 1,407 3.3 431 Delaware 28 89 0.7 124 Florida 263 4,394 14.2 310 Georgia 226 1,835 7.2 255 Hawaii 8 515 1.2 436 Idaho 94 162 1.2 139 Illinois 844 3,801 11.9 320 Indiana 280 1,212 5.8 209 Iowa 295 589 2.8 207 Kansas 246 456 2.6 176 Kentucky 172 759 3.9 197 Louisiana 189 633 4.3 146 Maine 87 175 1.2 141 Maryland 144 1,302 5.0 259 Massachusetts 188 1,375 6.1 227 Michigan 558 2,841 9.7 294 Minnesota 514 1,748 4.6 380 Mississippi 206 684 2.7 254 Missouri 284 809 5.3 152 Montana 47 73 0.9 84 Nebraska 357 367 1.6 224 Nevada 63 693 1.5 454 New Hampshire 56 257 1.1 224 New Jersey 279 1,948 8.0 245 New Mexico 124 538 1.7 320 New York 363 6,676 18.2 368 North Carolina 347 1,033 7.2 144 North Dakota 88 109 0.6 170 Ohio 353 2,063 11.2 185 Oklahoma 174 407 3.3 125 Oregon 126 1,010 3.1 322 Pennsylvania 442 2,445 12.0 203 Rhode Island 31 90 1.0 91 South Carolina 188 792 3.7 214 South Dakota 49 86 0.7 118 Tennessee 205 1,036 5.2 198 Texas 818 5,445 18.7 291 Utah 119 509 2.0 257 Vermont 27 94 0.6 161 Virginia 200 2,067 6.6 313 Washington 276 1,879 5.4 346 West Virginia 93 80 1.8 44 Wisconsin 444 1,461 5.1 284 Wyoming 21 23 0.5 48
(1) Excluding U.S. Possessions and Puerto Rico
Tax-exempt governmental bond volume has varied substantially during the 5-year period extending from 1991 through 1995. During this time, State and local governments issued $961.9 billion in new and refunding tax-exempt governmental bonds of which $719.2 billion were long-term in nature. New long-term tax-exempt governmental bonds issued in California, New York, Texas, Illinois, Florida, and Pennsylvania accounted for nearly half of the $376.3 billion issued during this period.
Data Sources and Limitations
The data presented in this article are based on information collected from Form 8038G, Information Return for Tax-Exempt Governmental Obligations, for bonds issued in years 1991 through 1995. A "bond" for this purpose is any obligation including a bond, installment purchase agreement, or financial lease, on which the interest is excluded from income under section 103 of the Internal Revenue Code. Data from Form 8038GC, Information Return for Small Tax-Exempt Governmental Bond Issues, Leases, and Installment Sales, which is filed for obligations with issue prices less than $100,000, are not included in this article.
Because the entire population of Forms 8038G was used for this study, there is no sampling error. A number of checks were performed to ensure that each return was internally consistent and to exclude duplicate and amended returns. In some instances, returns with incomplete information or errors were edited to resolve inconsistencies. However, in certain instances it was not possible to reconcile reporting discrepancies. Thus, a certain amount of filer and processing error remains.
Explanation of Selected Terms
Advance Refunding.--An advance refunding occurs when new bonds are issued prior to the date on which an outstanding issue of bonds can be redeemed (called). The proceeds of this new bond issue are used to fund an escrow account for the purpose of paying debt service on an outstanding issue until its call date. On that date, the remaining assets in the escrow account are liquidated and used to redeem the original bond issue.
Allocation to Reserve Fund.--This is the portion of proceeds of bond issues allocated to debt service reserves and "reasonably required reserve or replacement funds." The latter generally cannot exceed 10 percent of the total issue.
Bond Issuance Costs.--Issuance costs include fees paid for trustees, bond counsel, and the underwriters' discount.
Credit Enhancement Fees.--These fees are paid for such items as bond insurance premiums and letters of credit.
Governmental Bond.--Any obligation issued by a State or local governmental unit, which is not a private activity bond (see below). The interest on a governmental bond is excluded from gross income under Section 103 of the Internal Revenue Code.
Other Assets.--This category primarily includes types of issues not includable in other categories, such as parks and other recreation, courthouse, city hall or other government buildings, and general government operations. This category also includes a few issues for which the type(s) of issue was not specified.
Private Activity Bond.--This bond is generally a part of an issue of which more than 10 percent of the proceeds are to be used for any private business use, and more than 10 percent of the payment of the principal or interest is either secured by an interest in property used or to be used for private business use (for payment in respect for such property), or is to be derived from payments in respect of property, borrowed money used or to be used for a private business use. A bond is also considered a private activity bond if the amount of the proceeds to be used to make or finance loans (other than loans described in Internal Revenue Code section 141 (c)(2)) to persons other than governmental units exceeds the smaller of 5 percent of the proceeds or $5 million.
U.S. Possessions Including Puerto Rico.--Puerto Rico, the U.S. Virgin Islands, Guam, and the Northern Mariana Islands comprise this category in Tables 5 and 6.
Notes and References
 The term "State" includes the District of Columbia and any possession of the United States. Possessions of the United States reporting tax-exempt governmental bond issues for the period 1991 through 1995 were Puerto Rico, Guam, Northern Mariana Islands, and the U.S. Virgin Islands. Indian tribal governments may issue tax-exempt bonds for essential governmental purposes (and private activity bonds under limited circumstances). Such governmental issues are treated as issues of the various States in this article.
 The Tax Reform Act of 1969 (Public Law 91-172) imposed the first restrictions on the ability of issuers of tax-exempt bonds to generate arbitrage profits. For a general discussion of tax-exempt bonds as well as a more detailed discussion of their legislative history, see Zimmerman, Dennis, The Private Use of Tax-Exempt Bonds, The Urban Institute Press, Washington, D.C., 1991, Fundamentals of Municipal Bonds, Public Securities Association, Third Edition, New York, N.Y., 1987, and Fundamentals of Municipal Bond Law, National Association of Bond Lawyers, Wheaton, IL, 2000.
 For additional information, see Table 5-1, Analytical Perspectives, Budget of the United States Government--Fiscal Year 1997. This document is available at: www.gpo.gov/ usbudget.
 For additional information, see Table 5-1, Analytical Perspectives, Budget of the United States Government--Fiscal Year 2000. This document is available at: www.gpo.gov/ usbudget.
 For data on tax-exempt private activity bonds, see Nutter, Sarah E., "Tax-Exempt Private Activity Bonds, 1988-1995," Statistics of Income Bulletin, Summer 1999, Volume 19, Number 1.
 Historical statistics on State and local bond interest rates are available from the Federal Reserve Board, Statistical Release H.15, which contains historical data that are updated quarterly. These data are available at their website at: www.federalreserve.gov/releases/H15/ data.htm#fn15.
 Reported in Fundamentals of Municipal Bonds, Public Securities Association, Third Edition, New York, N.Y., 1987, p. 29.
This article was written by Sarah E. Nutter, an Assistant Professor at George Mason University.
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|Author:||Nutter, Sarah E.|
|Publication:||Statistics of Income. SOI Bulletin|
|Article Type:||Statistical Data Included|
|Date:||Sep 22, 2000|
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