Federal tax revenue losses for state and local tax-exempt bonds were about $28 billion in 2010, according to GAO's analysis of the Department of the Treasury's estimates. The loss occurs because taxpayers can exclude the bond interest from their federal taxable income.
For federal tax purposes, tax-exempt bonds are classified as either governmental bonds or private activity bonds. In general, governmental bonds are used to build public capital facilities like roads and serve the general public interest. Private activity bonds, which can be either taxable or nontaxable depending on their purpose, provide financing to private businesses and are subject to restrictions that do not apply to governmental bonds. State and local governments have issued governmental bonds for facilities, such as sports stadiums, that are generally considered to be for private use but may serve some broader public purpose.
Tax-exempt bonds are sometimes used to fund facilities or activities that are private in nature, costing the federal government revenue losses for purposes that may not merit federal subsidies. State and local governments have broad discretion in deciding which activities and facilities to finance using tax-exempt bonds. When they issue governmental bonds for facilities and activities that are essentially private, such as for hotels and golf courses, they may indicate that the bonds serve a broader public purpose. For example, they may indicate there are benefits to the community that extend beyond the purpose of the facility being financed by the bonds or that the facilities provide certain services to those who would not otherwise be able to use them. GAO was asked to identify hotels and municipal golf courses funded with tax-exempt bonds and found 18 hotels financed from 2002 through 2006 and six golf courses that opened in 2005 that GAO could confirm had some tax-exempt bond financing. However, it is not clear whether facilities like hotels and golf courses always provide public benefits to federal taxpayers that extend beyond the purposes of the facilities. Since GAO's 2008 report, applicable laws that would limit the use of tax-exempt bond financing have not been changed.
Members of Congress have recently shown interest in whether certain facilities providing benefits that are essentially private in nature, such as stadiums, should be financed with tax-exempt governmental bonds. However, similar attention has not been given to other types of facilities.
GAO continues to believe, as indicated in its February 2008 report, that as Congress considers whether tax-exempt governmental bonds should be used for professional sports stadiums that are generally privately used, it also should consider whether other privately used facilities, including hotels and golf courses, should continue to be financed with such bonds. How much additional federal revenue would be gained would depend on how broadly Congress applies new limitations. For instance, because wider-ranging limitations on governmental bonds would reduce the purposes for which such bonds may be issued, limitations that applied only to sports stadiums would raise less revenue than limitations that applied more broadly to include additional types of facilities, such as hotels and golf courses.
The information contained in this analysis is based on the related GAO product listed under the "Related GAO Products" tab and updated data on the amount of lost federal revenue each year.
For additional information about this area, contact Michael Brostek at (202) 512-9110 or firstname.lastname@example.org.
The outstanding amount of state and local government tax-exempt bonds has increased over the years. Congress is interested in whether the bonds are used for appropriate purposes since the federal government forgoes billions in tax revenues annually by excluding the bonds' interest from investors' federal gross income. Questions also exist over the bonds' borrowing costs as they can divert funds fr...