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Information > Financial Terms > This page Industrial Revenue Bonds A
special classification of MUNICIPAL BONDS, also called lease rental bonds,
typically issued by a municipality to provide funds, for example, for
the building of a plant to the specifications of a particular private
company, that is granted a long-term lease to the plant at rental designed
to be adequate for interest and principal payments on the bonds by the
municipality. Motivation
for such issues has been to attract desirable industry to particular locations
for economic development, and thus another term for such type of bonds
has been Industrial Development Bonds, or IDBs. After
the state of Mississippi led the way in 1936, with its "Balance Agriculture
with Industry" state legislation authorizing such issues for municipalities,
issues of this type was relatively rare until the 1960s, when volume substantially
increased to a reported 1968 total of 10% of all long-term tax-exempt
state and municipal bond issues.
By that time, over 40 states were reported to have passed legislation
authorizing such issues; as of 1982, all 50 states and the District of
Columbia had enacted laws pertaining to Industrial Revenue Bonds and Small
Issue Industrial Development Bonds. Faced
with the rising volume of such IDBs, then exempt from federal income taxes
in any amount, the Treasury Department in 1967 issued a ruling making
IDBs subject to taxes in any amount, outstanding.
The Revenue and Expenditure Control Act of 1968, as amended in
1978, has replaced the Treasury ruling, but has provided tax exemption
for specified "small issues" of Industrial Development Bonds
in outstanding maximums issued by the municipality of either $1 million
or $10 million. The act further
specified that substantially all of the proceeds from the small issues
must be used to acquire, construct, or improve depreciable property.
Besides the "small issue" IDB exemption, the act provided
federal tax exemption for issues in any amount for any amount of total
capital expenditures on projects of specific types, privately owned, if
they satisfy the public-use test, and involve what may be considered traditional
municipal functions (sewage or solid-waste disposal facilities, pollution
control, water, electricity and gas of a local nature, airports, docks,
wharves, sports or convention facilities, mass commuting facilities, industrial
parks, etc.). But nontraditional
functions also became common. Tax-exempt
bonds were also used to finance residential mortgages, to such an increasing
volume in 1979-1980 that the Mortgage Subsidy Bond Tax Act of 1980 was
passed prohibiting the issuance of any such bonds to subsidize single-family
mortgages after December 31, 1983. Most
IDBs are of the "revenue" (limited liability) type, meaning
that the full faith and credit and general taxing power of the issuer
are not pledged, which would make them general obligation bonds subject
to debt limits, if any, on the issuer. Instead, these issues are dependent upon the receipt of revenue
from the private parties financed, to cover interest and principal payments. Back to Information |