Unlimited Tax Bond

Unlimited Tax Bond — Definition and Overview

An unlimited tax bond is a municipal bond secured by the issuing government’s full taxing power. Repayment is supported by the authority to levy and, if needed, increase taxes (property, sales, special taxes, etc.) on residents to meet debt service. Unlimited tax bonds are a form of general obligation (GO) bond and are typically used to fund public projects such as roads, parks, and schools.

How It Works

• Issuer pledge: The municipality pledges its “full faith and credit” and broad taxing authority to repay principal and interest.
• Taxing power: The issuer can draw on multiple tax sources and, in principle, raise tax rates without a fixed statutory cap to cover payments.
• Voter approval: Many unlimited tax bond issues require voter approval, which signals public support and helps demonstrate demand and repayment capacity.
• Creditworthiness: Credit analysts assess the issuer’s ability to collect taxes, enforce penalties on delinquents, diversify revenue, and withstand economic stress.

Unlimited vs. Limited Tax Bonds

Unlimited tax bonds
* Backed by the issuer’s full taxing power.
* Can, in theory, increase taxes without a statutory ceiling to meet obligations.
* Often receive higher credit ratings and therefore trade at lower yields relative to comparable bonds.

Limited tax bonds
* Repayment depends on taxes that may be limited by statute or capped at a maximum rate.
* The issuer can raise taxes only up to the legal limit to satisfy debt service.
* Typically carry more risk than unlimited tax bonds and may offer higher yields.

Relationship to Revenue Bonds

Revenue bonds are a separate class of municipal bonds repaid from specific project revenues (tolls, utility fees, stadium receipts). They do not rely on broad taxing power and generally have different risk and yield profiles than GO bonds (including unlimited tax bonds).

Why Investors Consider Unlimited Tax Bonds

• Lower credit risk relative to many other municipal bond types because of tax-backed security and (often) voter approval.
• Historically lower yields reflect stronger perceived safety.
• Useful in conservative bond allocations seeking municipal tax-backed income.

Key Risks and What to Check

• Practical limits: Political constraints, legal restrictions, and economic stress can limit the issuer’s ability to raise taxes despite the “unlimited” label.
• Tax base health: Evaluate property values, income levels, employment, and population trends.
• Collection/enforcement: Review tax collection history and delinquency rates.
• Fiscal condition: Examine debt levels, pension liabilities, budget reserves, and overall financial management.
• Bond covenants: Read voter-approved language and statutes that define taxing powers and repayment obligations.

Takeaway

Unlimited tax bonds are municipal general obligation bonds backed by broad taxing authority and often by voter approval. That structure tends to reduce credit risk and lower yields relative to limited tax or revenue bonds, but investors should still review the issuer’s fiscal strength, tax base, and legal constraints before investing.