What is an Unlimited Tax Bond
Unlimited tax bonds are a type of municipal bond backed by the full faith and commitment of the issuer, which is generally a city or municipality, to raise taxes, without limit, to service the debt until it is repaid. Because of this feature, unlimited tax bonds may have higher credit ratings and offer lower yields than other comparable municipal bonds of the same maturity.
BREAKING DOWN Unlimited Tax Bond
Unlimited tax bonds fall within the universe of tax-supported bonds, one of two primary sources of municipal bond repayments. The other major source of pledge muni repayments is revenue bonds, which are supported by revenue streams from projects such as a toll bridges, highways or local stadiums, or from essential services such as water, sewer and electricity providers.
Tax-supported municipal bonds, also known as general obligation bonds (GOs), are divided into two subcategories:
Unlimited Tax GOs: Backed by the full taxing power of the issuer, unlimited-tax bonds can use property taxes, sales taxes, special taxes, and other sources of income to repay the bonds, as well as the interest owed to investors.
Limited Tax GOs: These muni bonds are secured by some limited taxing power of the issuer. For instance, an issue may be secured by a town’s property tax subject to a maximum rate at which the tax may be imposed.
In theory, unlimited tax bond issuers can raise taxes at an unrestricted rate. In practice, however, it may be difficult to raise taxes beyond a certain point. One of the factors that credit analysts use to rate such bonds is the ability of the issuer to enforce penalties against and recover taxes from delinquent taxpayers.
Real Examples of Unlimited Tax Bond Issuance
From small towns to big cities to entire states, unlimited tax municipal bonds vary as widely as the geographies from which they’re issued. Here are three real-world examples of unlimited tax bonds being offered in June 2018, detailing the issuers, principal amount of the bonds, states of origin, and maturities:
- $2,300,000 Harris County, Texas, Municipal Utility Unlimited Tax Road Bonds, maturing 2022-2045
- $140,265,000 Washington State Federal Way School District Unlimited Tax GO Bonds, maturing 2019-2037
- $49,265,000 City of Hampton, Virginia, Unlimited Tax GO Public Improvement Bonds, maturing 2019-2038
Voter Approval Lowers Unlimited Tax Bond Risk
Unlimited tax municipal bonds have historically had lower risk than most other bond categories, primarily because unlimited tax bonds can only be created when taxpayers vote to approve the bond issues. This requirement clearly indicates the level of demand for the bonds. Voter approval also means the voters of a given population support the initiative, and there are usually more than adequate assets or taxing power built into the voting language to repay investors who provide the funds.