Unlimited Tax Bond: What It is, How It Works

What Is an Unlimited Tax Bond?

Unlimited tax bonds are municipal bonds guaranteed by a government’s full faith and credit, allowing the government to levy taxes until the debt is repaid.

The repayment of an unlimited tax bond is based on the issuer’s ability to levy taxes; a municipality may increase property taxes to cover payments and obligations.

Key Takeaways

• Unlimited tax bonds are municipal bonds guaranteed by a government’s full faith and credit, allowing the government to levy taxes until the debt is repaid.
• Unlimited tax bonds may have higher credit ratings and offer lower yields than comparable municipal bonds.
• Unlimited tax bonds can only be created with taxpayer approval, indicating demand for the bonds.

Understanding an Unlimited Tax Bond

Unlimited tax bonds are a type of tax-supported bond, also known as a general obligation (GO) bond.

GO bonds provide income for government projects like roads, parks, and bridges, serving the public community.

Revenue bonds, another type of GO bond, are supported by revenue streams from projects like toll bridges, highways, and local stadiums, or essential services like water, sewer, and electricity providers.

GO bonds may be specified as limited or unlimited in terms of taxation available.

Unlimited Tax Bond vs. Limited Tax Bond

Backed by the full taxing power of the issuer, unlimited tax bonds can use various sources of income to repay the bonds and interest owed to investors.

In theory, unlimited tax bond issuers can raise taxes at an unrestricted rate, but in practice, there may be limitations.

Credit analysts consider the ability of the issuer to enforce penalties and recover taxes from delinquent taxpayers when rating unlimited tax bonds.

Unlimited tax bonds typically have higher credit ratings and lower yields compared to similar municipal bonds.

Unlimited tax bonds can only be created with taxpayer approval, indicating demand and support from the population.

Limited tax bonds require issuing local governments to raise property taxes to meet debt service obligations, within a statutory limit.