Introduction

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State and local governments sell bonds to finance public projects and certain qualified private activities. Most of the bonds issued are tax-exempt bonds, which means that the interest payments are not included in the bondholder's taxable income. Because of the difference in taxability, state and local government tax-exempt (municipal) bonds offer a lower interest rate than corporate bonds. The federal government is, in effect, providing a subsidy for projects that use tax-exempt financing.

Public projects financed with bonds include schools, roads and bridges, water and wastewater systems, and police and fire stations.

Tax credit bonds provide another form of federal subsidy designed to benefit state and local governments. These bonds derive federal subsidy in the form of "payments", or tax credits, made either directly to the issuer to reduce taxable interest costs or to the investor to reduce income tax liability.

Summary of Bond Provisions

The American Recovery and Reinvestment Tax Act of 2009 (ARRTA) "Division B" of American Recovery and Reinvestment Act of 2009 (ARRA):

  • Provides for the use of new tax credit bonds as alternative means of financing projects that are typically financed with traditional tax-exempt bonds issued by state and local governments.
  • Expands certain tax credit programs already in place, and
  • Introduces measures to improve the marketability of tax-exempt bonds.

The links below provide descriptions of each bond program:

The summary information provided is for quick reference only. Issuers should consult with their bond counsel and financial advisor to determine their eligibility and for advice on the appropriateness of the described bonds for an issuer's particular situation. Investors should consult with their tax or financial advisor for the appropriateness of investment in the described bonds for their particular situation.

Information provided by the Executive Office for Administration and Finance