Environmental Infrastructure

Although state and local governments rely heavily on tax-exempt bonds to finance environmental infrastructure and comply with federal environmental mandates, Congress has capped the volume of tax-exempt bonds that can be issued each year for this purpose. GAO discovered that capital spending and the volume of tax-exempt bonds issued for environmental projects have changed little since the law was revised, suggesting that the volume cap has not curbed overall investment nationwide. Nevertheless, capital spending on the environment as a percentage of the gross domestic product has fallen. Moreover, it has not kept pace with the rising tide of federal environmental mandates, which will require considerably higher levels in the future. The volume cap has discouraged some companies from investment in environmental infrastructure, in large measure because states' allocation processes give low priority to environmental projects. Also, several states allocate private activity bond authority on a first-come, first-served basis, increasing the risk that investors will be unable to secure all necessary financing. However, private companies claim that the 1986 Tax Reform Act, which eliminated the investment tax credit and lengthened depreciation schedules, has had the greatest influence on their decisions to invest in environmental infrastructure.

GAO found that: (1) the volume cap has not reduced nationwide investment in environmental infrastructure, since capital spending and the volume of tax-exempt bonds issued for environmental projects have not significantly changed; (2) the volume cap has resulted in fewer private activity bonds (PAB) issued for environmental projects, since states use only a portion of their PAB allocation for these projects; (3) some state governments have substituted tax-exempt government bonds for PAB to finance environmental projects; (4) capital spending on the environment has not kept pace with federal environmental mandates; (5) the Environmental Protection Agency has developed an environmental financing program to foster public-private partnerships and encourage innovative, efficient solutions to environmental needs due to problems with state environmental funding; (6) the volume cap discourages environmental infrastructure investment by some companies, since environmental projects have a low priority in state allocation processes and many states allocate PAB on a first-come, first-served basis; (7) the elimination of investment tax credits and lengthened depreciation schedules have had a greater impact on private companies' investment decisions than the volume cap; and (8) limiting the subsidy on tax exempt bonds could cause local governments to fund projects that benefit the public the most and help ensure that private investment decisions are not influenced by tax considerations.