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Prioritization in private-activity-bond volume cap allocation

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  • Stephan D. Whitaker

Abstract

This 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.

Suggested Citation

  • Stephan D. Whitaker, 2011. "Prioritization in private-activity-bond volume cap allocation," Working Papers (Old Series) 1110, Federal Reserve Bank of Cleveland.
    • Handle: RePEc:fip:fedcwp:1110
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    References listed on IDEAS

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    1. Rui J. P. De Figueiredo & Geoff Edwards, 2007. "Does Private Money Buy Public Policy? Campaign Contributions and Regulatory Outcomes in Telecommunications," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 16(3), pages 547-576, September.
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    Keywords

    Municipal bonds; Tax exemption;

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