Limited tax bond
Also known as: limited tax general obligation bond, limited obligation bond
A limited tax bond is a general obligation municipal bond backed by a specific tax source or a capped tax rate, rather than the issuer's unlimited taxing power. The restriction makes it slightly riskier than an unlimited tax G.O. bond.
A limited tax bond is a type of general obligation (G.O.) municipal bond whose repayment is supported by taxes — but only up to a legal limit. The issuing municipality pledges a specific tax (such as a portion of property or sales taxes) or a capped tax rate to service the debt, instead of promising to raise taxes as high as necessary to pay bondholders.
Compare this with a standard unlimited tax G.O. bond, where the issuer pledges its full faith, credit, and unlimited taxing power. If revenues fall short on an unlimited tax bond, the municipality can raise property tax rates without restriction to cover debt service. With a limited tax bond, the issuer cannot exceed the statutory cap even if collections come up short, so bondholders bear somewhat more credit risk and typically demand a slightly higher yield.
Municipalities issue limited tax bonds when state law or local charter caps their taxing authority, or when voters have not approved the unlimited pledge that many jurisdictions require for full G.O. debt. The bonds still count as general obligations — they are backed by taxing power, just a constrained version of it — which distinguishes them from revenue bonds, which are repaid solely from the earnings of a specific project or facility.
Securities licensing exams treat limited tax bonds as part of the municipal debt landscape. The SIE exam expects you to recognize them as a G.O. variant with a restricted tax pledge, and the Series 7 goes deeper, testing how the limited pledge affects credit analysis relative to unlimited tax G.O. bonds and revenue bonds.
Key takeaways
- A limited tax bond is a G.O. municipal bond backed by a specific tax or a capped tax rate.
- Unlike unlimited tax G.O. bonds, the issuer cannot raise taxes beyond the legal limit to pay bondholders.
- The capped pledge adds credit risk, so limited tax bonds generally yield slightly more than comparable unlimited tax bonds.
- They differ from revenue bonds, which rely on project earnings rather than any taxing power.
- Both the SIE and Series 7 exams test limited tax bonds within municipal G.O. debt.