Prioritization in private-activity-bond volume cap allocation
AbstractThis paper proposes and tests a structural model reflecting the process of authorizing private-activity municipal bond issuance. Private-activity municipal bonds offer tax-exempt financing for programs including industrial development, utilities, low-income housing, and student loans. The Federal tax code sets annual caps on the total tax-exempt issuance within each state, so authorization becomes a scarce resource distributed via a political process. Interviews with program administrators in several states suggested the authorization process involves prioritizing categories of use, authorizing bonds for high-priority uses first, and then authorizing bonds for lower-priority uses until the cap is exhausted. A model representing this process suggests variables to include in reduced-form estimations and an alternative interpretation of the coefficients. The fit of the model can be improved by adding measures of political influence and imposing a structure that reflects the political prioritization process. In general, industrial development and utilities appear to be the highest priority uses of private-activity municipal bonds. Mortgage revenue bonds are the residual category most frequently.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Cleveland in its series Working Paper with number 1110.
Date of creation: 2011
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-05-30 (All new papers)
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