private activity municipal bond or industrial revenue bond that is subject to federal and state income taxes at the ordinary tax rate. Also called a nonessential function bond, or private purpose bond. The Tax Reform Act of 1986 repealed the tax exemption for bonds financing convention centers, sports facilities, and other quasi-municipal facilities. Interest income on bonds issued after August 7, 1986 that exceed state caps on issuance of tax-free municipals are fully taxable bonds. Certain investors also are subject to the alternative minimum tax on interest income from private activity bonds. Taxable municipals generally pay higher interest rates than other munis, but are protected from early redemption by call protection features. Such bonds may also be exempt from state and local taxes in the state where they are issued. States that exhaust their allowed limit of tax-exempt bonds frequently issue taxable bonds, generally to finance private development.
taxable debt obligation of a state or local government entity, an outgrowth of the tax reform act of 1976 (which restricted the issuance of traditional tax-exempt securities. Taxable municipal bonds are issued as private purpose bond to finance such prohibited projects as a sports stadium; as municipal revenue bonds where caps apply; or as public purpose bonds where the 10% private use limitation has been exceeded.
