Environmental Infrastructure:

Effects of Limits on Certain Tax-Exempt Bonds

RCED-94-2: Published: Oct 28, 1993. Publicly Released: Nov 29, 1993.

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Pursuant to a congressional request, GAO reviewed the impact of the volume cap on state and local investment in environmental infrastructure, focusing on: (1) national investment in drinking water, wastewater treatment, and solid waste facilities; and (2) the cap's effect on private companies' investments in those facilities.

GAO found that: (1) the volume cap has not reduced nationwide investment in environmental infrastructure, since capital spending and the volume of tax-exempt bonds issued for environmental projects have not significantly changed; (2) the volume cap has resulted in fewer private activity bonds (PAB) issued for environmental projects, since states use only a portion of their PAB allocation for these projects; (3) some state governments have substituted tax-exempt government bonds for PAB to finance environmental projects; (4) capital spending on the environment has not kept pace with federal environmental mandates; (5) the Environmental Protection Agency has developed an environmental financing program to foster public-private partnerships and encourage innovative, efficient solutions to environmental needs due to problems with state environmental funding; (6) the volume cap discourages environmental infrastructure investment by some companies, since environmental projects have a low priority in state allocation processes and many states allocate PAB on a first-come, first-served basis; (7) the elimination of investment tax credits and lengthened depreciation schedules have had a greater impact on private companies' investment decisions than the volume cap; and (8) limiting the subsidy on tax exempt bonds could cause local governments to fund projects that benefit the public the most and help ensure that private investment decisions are not influenced by tax considerations.

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