What Is an Unlimited Tax Bond?
Let me explain unlimited tax bonds directly: these are a type of tax-supported bond where repayment relies on the issuer's power to impose and raise taxes on residents. As the issuer, a municipality can hike property taxes or other levies to cover payments and obligations. You should know this makes them secure, but it's all tied to that taxing authority.
Key Takeaways
- Unlimited tax bonds may have higher credit ratings.
- They offer lower yields than other comparable municipal bonds of the same maturity.
- Unlimited tax bonds can only be created when taxpayers vote to approve the bond issues, which is an indication of demand for the bonds.
Understanding an Unlimited Tax Bond
Unlimited tax bonds fall under tax-supported bonds, often called general obligation (GO) bonds. I see them as a tool for local governments to generate income for projects like roads, parks, equipment, and bridges. These are typically aimed at funding initiatives that benefit the public community.
You might confuse them with revenue bonds, another GO bond type. Revenue bonds get backed by income from specific projects—think toll bridges, highways, local stadiums, or essential services like water, sewer, and electricity providers.
For any GO bond, the taxation level can be limited or unlimited—that's a key distinction you need to grasp.
Unlimited Tax Bond vs. Limited Tax Bond
Backed by the issuer's full taxing power, unlimited tax bonds draw from property taxes, sales taxes, special taxes, and other income sources to repay the bonds and interest to investors. These are secured by some limited taxing power, like a town's property tax capped at a maximum rate.
In theory, issuers of unlimited tax bonds can raise taxes without limits. But in practice, pushing taxes too high gets tough. Credit analysts factor in the issuer's ability to enforce penalties and recover from delinquent taxpayers when rating these bonds. With the government guarantee, unlimited tax bonds often get higher credit ratings and provide lower yields than similar municipal bonds of the same maturity.
Historically, unlimited tax municipal bonds carry lower risk than most other bond types, mainly because they require taxpayer votes for approval. This voter process shows clear demand for the bonds. It also means the population supports the project, and the voting language usually includes sufficient assets or taxing power to repay investors.
While unlimited tax bond issuers can theoretically increase taxes unrestricted, limited tax bonds require the local government to raise property taxes if needed for debt service—but only up to a statutory limit.
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