What Is an Unlimited Tax Bond?
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What Is an Unlimited Tax Bond?

3 Min.

Unlimited tax bonds are a type of municipal bonds that are backed by the full faith and credit of a government. The government issuing the bond can levy taxes without any limit until the debt is repaid. These bonds usually have higher credit ratings and offer lower yields as compared to other comparable municipal bonds of the same maturity. The creation of unlimited tax bonds requires the approval of taxpayers through voting, which is an indication of demand for the bonds.

Basics

Municipal bonds with unlimited tax backing are secured by the unwavering fiscal commitment of a governing body, enabling them to impose taxes until the debt is fully settled. The redemption of such bonds hinges upon the issuer's capacity to impose taxes on its constituents. Consequently, a local government can augment property taxes to adequately satisfy its financial commitments and responsibilities.

Exploring Unlimited Tax Bonds

Unlimited tax bonds, often called General Obligation (GO) bonds, are a tax-backed bond category. These bonds are a funding tool employed by local governments to generate revenue streams aimed at financing public infrastructure like roads, parks, equipment, and bridges.

Within the spectrum of GO bonds, there exist revenue bonds as well. These revenue bonds draw support from income streams originating from projects like toll bridges, highways, local stadiums, and essential public services, such as water, sewage, and electricity providers. It's important to note that the taxing capacity of a specific GO bond can be classified as either limited or unlimited.

Unlimited Tax Bonds vs. Limited Tax Bonds

Unlimited tax bonds wield the full fiscal authority of the issuer, tapping property taxes, sales taxes, special levies, and diverse income sources for bond repayment and interest obligations. In contrast, limited tax bonds operate with constrained fiscal authority. For instance, a municipal bond may be secured by a town's property tax, subject to a maximum tax rate.

In principle, unlimited tax bond issuers possess unbridled tax hike potential. However, in practice, raising taxes significantly can be challenging. Credit analysts assess issuer competence in enforcing penalties and recovering delinquent taxes, impacting bond ratings. Consequently, unlimited tax bonds tend to bear higher credit ratings and yield lower returns than municipal bonds with the same maturity.

Historically, unlimited tax municipal bonds present a lower risk due to a unique prerequisite: they require voter approval. The demand for such bonds is evidenced by this approval, signifying public backing. Voter support indicates a robust funding mechanism, typically featuring ample assets or taxing authority to assure investor repayment. Conversely, limited tax bonds obligate local governments to augment property taxes for existing debt service needs, yet statutory limits bind this augmentation.

Conclusion

Unlimited tax bonds, often known as General Obligation (GO) bonds, represent a secure and reliable investment option within municipal bonds. These bonds derive their strength from the issuer's boundless taxing authority, encompassing property taxes, sales taxes, and various revenue sources. Their creditworthiness is bolstered by the requirement for voter approval, underscoring public solid support and a robust funding mechanism. In contrast to their limited tax counterparts, unlimited tax bonds tend to offer higher credit ratings and lower yields, making them an attractive choice for risk-averse investors seeking stable returns in municipal finance.

Unlimited Tax Bond
Limited Tax Bond
General Obligation (GO) Bond
Revenue Bond
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