Special Tax Bond
What Is Special Tax Bond?
A special tax bond is a type of municipal bond that is normally repaid with revenue from a tax demanded against an existing activity or asset specifically for that purpose.
Understanding Special Tax Bond
A municipal bond is issued by a state or nearby government to fund community projects like interstates, sewage systems, hospitals, parks, and public schools. A municipal bond backed by revenue produced by expanding a specific tax is alluded to as a special tax bond.
A special tax bond is a hybrid security that joins elements of a general obligation bond and a revenue bond. As a revenue bond, the special tax bond services its debt from special taxation funds. As an overall obligation bond, it is secured by the full faith and credit of the municipal issuer. A special tax is normally forced on everybody through designated taxes. After the tax payments are collected, they are utilized to make interest and principal repayments on the outstanding bonds.
Bondholders who purchase a special tax bond receive periodic interest from the issuer until the bond develops, when the principal will be repaid. Payment obligations are guaranteed from revenue derived from the addition of tax the issuer requires specifically for paying back its debt. Special tax bonds are repaid with either excise taxes or special assessment taxes, however not by ad valorem taxes.
The special tax might remember taxes for gas, tobacco, inn stays, road use, sales, and so on. Ad valorem taxes are generally not considered for these types of bonds. Revenue from special taxation must be utilized for no other purpose except for to pay holders of the bond used to finance the specific project. The bond indenture or resolution may remember rules for how the tax proceeds are to be utilized however long the bond's life would last.
For instance, say a special tax bond is issued by a city to fund the building of another hospital wing dedicated to the treatment of malignant growth. Investors who purchase this bond hope to receive interest income in return for lending their money. The city guarantees the interest payments by collecting an excise tax on cigarettes at the point of sale. The revenue from the tax is utilized to pay the debt to bondholders.
Special Assessment Bond
A type of special tax bond is the special assessment bond, which is a bond which has its payment obligations guaranteed from revenue received from the addition of taxes on occupants who straightforwardly benefit from the project. All in all, the people who will benefit straightforwardly from the property improvement are imposed an extra tax to assist with the interest payments on the bond issue.
An illustration of a project for which a special assessment bond might be issued is the building of another interstate. Individuals who live in adjacent areas of the proposed turnpike would be subject to an increased property tax in light of their probability of utilizing the new road. Since the interest on special assessment bonds is paid by taxes of the community that benefit from the development, it isn't unusual for individuals from the benefiting community to invest in the issue, accordingly, offsetting the extra taxes that are required to finance the bond.
Features
- A special tax bond is a hybrid security that consolidates highlights of an overall obligation bond and a revenue bond.
- A special tax bond is a type of municipal bond normally repaid with tax revenue imposed against an existing activity or asset.
- Special tax bonds are repaid with either excise taxes or special assessment taxes, yet not by ad valorem taxes.
