Challenges and Opportunities for Innovation in the Public Works ...

carrying costs of tax-exempt bonds and the imposition of the alternative minimum tax on certain
tax-exempt securities, have had the effect of lowering the demand for tax-exempt debt which
results in higher interest rates for the issuing governments. Other changes in the Tax Reform
Act, such as the state volume cap and private-use test, which is described elsewhere in this paper,
have forced issuers to substitute taxable debt for tax-exempt debt, which incurs significantly
higher debt service requirements. The statewide volume caps limit the amount of "private
activity" tax-exempt bonds that may be issued within a state in any given year to the greater of
$50 per capita or $150 million. This means that tax-exempt debt for certain infrastructure
projects such as facilities for solid waste disposal must compete with other tax-exempt debt such
as mortgage revenue bonds and bonds for multifamily rental housing in order to obtain an
allocation under the volume cap. The only solid waste disposal facilities not subject to the
volume cap are those that are entirely government owned.
In addition, there are increased administrative costs of issuance associated with other
tax law changes such as bond registration and the arbitrage rebate requirements that have
prompted governments to eliminate or postpone improvements. The bond registration
requirement, enacted in the 1982 Tax Equity and Fiscal Responsibility Act, closed down the
ability of state and local governments to issue bonds in bearer form. The arbitrage rebate
requirement, enacted as part of the 1986 Tax Reform Act, mandates that any income derived
from the investment of bond proceeds that exceeds the yield on the bonds (known as "arbitrage
earnings") must be "rebated" to the federal government. While there are exceptions to the
requirement, one of which is described elsewhere in this paper, nevertheless the administrative
costs associated with calculating and tracking bond proceeds and yield restriction where
required by law or necessary to avoid rebate payments, place a tremendous financial burden on
state and local governments.
State regulations may also provide barriers to infrastructure provision. The
governmental power restrictions discussed earlier are particularly applicable at this level. The
ability to initiate new revenue sources for infrastructure provision is an important at this time,
and in several states that ability is limited by a requirement for authorization from the state
government. In other states, Massachusetts is an example, the state control over the assessment
process also has repercussions on a community's ability to raise revenues, due to limitations on
the tax base.
Local governments are impeded by state regulations concerning purchasing and cash
management. Some states have very conservative policies concerning the investment of public
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