Taxable Municipal Bonds

Summary

Taxable bonds are municipal bonds in which the interest paid to investors is subject to federal income tax . The most common types of taxable municipal bonds are industrial revenue bonds and economic development bonds.

Advantages

• Taxable municipal bonds can be used to finance projects, such as sports stadiums, that are not eligible for financing with tax-exempt bonds.
• Taxable bonds may be an option when a government does not have sufficient capacity to issue tax-exempt bonds due to limits imposed by the federal government. For example, the issuance of tax-exempt private activity bonds by state and local governments within a particular state is limited to the greater of $150 million or $50 per state resident per year.
• Taxable bonds are not subject to certain types of federal laws that apply to tax-exempt bonds, such as restrictions on arbitrage earnings or loans to veterans.
• Issuers of taxable bonds may be able to take advantage of the demand in foreign markets. (Tax-exempt bonds usually are not sold in foreign markets since the interest rates are lower than taxable bonds and foreign investors do not benefit from the tax-exempt status of the bonds.)

Disadvantages

• Investors demand higher interest rates on taxable municipal bonds than on tax-exempt bonds since the interest is subject to federal income tax.