Tax Policy:

Internal Revenue Code Provisions Related to Tax-Exempt Bonds

GGD-91-124FS: Published: Sep 27, 1991. Publicly Released: Sep 27, 1991.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) oversight of tax-exempt bonds, focusing on the relevant tax code provisions that IRS is responsible for administering to ensure that bonds qualify for tax-exempt status.

GAO found that: (1) since 1968, state and local government's use of tax-exempt bond financing has increased substantially; (2) in 1968, the volume of outstanding long-term tax-exempt bonds was about $114 billion, whereas at the end of 1990, the volume of outstanding tax-exempt bonds increased to about $796 billion; (3) this growth in tax-exempt bond volume represents an increasingly greater federal subsidy because of the forgone tax revenue due to the tax-exempt nature of the interest earned; and (4) Congress was concerned that the growth in the use of tax-exempt bonds over the years represented a particularly high volume of tax-exempt bonds that were issued primarily to benefit private parties and organizations, rather than to fulfill traditional government purposes. GAO noted that as a result of such concerns, Congress passed a number of laws to: (1) identify inappropriate bond usage for public purposes by establishing non-public usage restrictions; (2) eliminate inappropriate use of tax-exempt bond financing for private activity projects; (3) reduce the volume of tax-exempt private activity bonds; and (4) limit the states' issuance of tax-exempt bonds for student loans.

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