The federal tax code classifies state and local bonds as either governmental bonds or private activity bonds. Governmental bonds are for projects that benefit the general public, and private activity bonds are for projects that primarily benefit ...
private entities. Typically, the interest earned by holders of these bonds is exempt from federal income taxes. The federal tax code allows state and local governments to use tax-exempt bonds to finance certain projects that would be considered private activities. The private activities that can be financed with tax-exempt bonds are called "qualified private activities". This book provides background information on the economic rationale for the federal limitation on tax-exempt bonds for private activities and explains the rules governing qualified private activity bonds.