What Is Special Tax Bond?
A special tax bond is a sort of municipal bond that is often repaid with money generated by a tax imposed especially against an existing activity or asset for that purpose.
- A special tax bond is a form of municipal bond that is normally repaid using tax income from an existing activity or asset.
- A special tax bond is a hybrid instrument that includes the characteristics of both a general obligation bond and a revenue bond.
- Ad valorem taxes are not used to repay special tax bonds; instead, excise taxes or special assessment taxes are used.
Understanding Special Tax Bond
A municipal bond is a government bond issued by a state or local government to support community projects such as roadways, sewage systems, hospitals, parks, and public schools. A special tax bond is a municipal bond that is backed by money earned by raising a specific tax.
A special tax bond is a hybrid instrument that includes the characteristics of both a general obligation bond and a revenue bond. The special tax bond, like a revenue bond, is serviced by special taxation funds. As a general obligation bond, it is backed by the municipal issuer’s full faith and credit. Generally, a special tax is placed on the broader population via defined taxes. After tax payments are received, they are utilized to repay interest and principal on existing bonds.
Bondholders who buy a special tax bond get monthly interest payments from the issuer until the bond matures, at which point the principle is refunded. Payment obligations are secured by money produced from an increase in tax levied by the issuer particularly for the purpose of repaying its debt. Ad valorem taxes are not used to repay special tax bonds; instead, excise taxes or special assessment taxes are used.
Gasoline, cigarettes, hotel stays, road usage, sales, and other taxes may be included in the special tax. Ad valorem taxes are often not addressed when issuing these sorts of bonds. Revenue from special taxes must be utilized only to reimburse holders of the bond used to fund the particular project. The bond indenture or resolution may contain instructions on how to spend the tax profits throughout the remainder of the bond’s existence.
Assume a city issues a special tax bond to support the construction of a new hospital wing devoted to cancer treatment. Investors who buy this bond anticipate receiving interest income in exchange for lending their money. The city ensures the interest payments by levying an excise fee at the point of sale on cigarettes. The tax collected is utilized to pay off bondholders’ obligation.
Special Assessment Bond
The special assessment bond is a form of special tax bond that has its payment obligations secured by money generated from the increase in taxes on people who directly benefit from the project. In other words, individuals who would directly benefit from the property renovation will be subject to an extra tax to assist cover the interest payments on the bond issuance.
A new motorway is an example of a project for which a special assessment bond might be issued. People who reside near the planned motorway would face higher property taxes depending on their probability of utilizing the new route. Because the interest on special assessment bonds is paid by taxes collected on members of the community that benefits from the development, it is not uncommon for members of the benefitting community to participate in the issuance, therefore offsetting the extra taxes charged to fund the bond.
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