Private-Activity Municipal Bonds: The Political Economy Of Volume Cap Allocation

State governments allocate authority, under a federally imposed cap, to issue tax-exempt bonds that fund "Private activities" such as industrial expansion, student loans, and low-income housing. This paper presents political economy models of the allocation process and an empirical analysis. Due to an idiosyncrasy of the tax code, the annual per capita volume cap varies widely between states. The author estimates that, on average, there is an additional $0.80 per capita per year of borrowing for each additional dollar per capita of volume cap. This confirms that the cap is a binding constraint in most cases, and authority to issue tax-exempt bonds is a scarce resource.

Provided by: Federal Reserve Bank of Cleveland Topic: Security Date Added: Sep 2010 Format: PDF

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