What is a common impact of the Federal Tax Reform Act of 1986 on municipal finance?

The Federal Tax Reform Act of 1986 had significant implications for municipal finance, particularly regarding tax-exempt bonds. One of the primary outcomes of this legislation was the imposition of stricter limitations on the issuance of tax-exempt bonds. Prior to the reform, municipalities enjoyed greater flexibility and fewer restrictions when it came to using this financing mechanism.

The Act introduced restrictions designed to curb what were perceived as abuses in the tax-exempt bond market, particularly concerning the financing of projects that could be deemed as private enefits. Consequently, this led to a decrease in the attractiveness of tax-exempt bonds for certain types of projects and limited the scope of what municipalities could finance through these instruments.

Overall, the restriction on tax-exempt bonds directly impacted municipalities' ability to raise funds cheaply through bond issuance, consequently affecting their financial strategies and project development. The emphasis on tightening the regulations illustrates the ongoing balance between providing favorable financing options to public entities while ensuring that these benefits are not unfairly leveraged for private gains.