Understanding Sales Tax Bonds: Nuveen's Dan Close on Resilience and Protections

What Are Sales Tax Bonds?

• 💡 Sales tax bonds are municipal bonds where the revenue generated from sales taxes is leveraged to fund large infrastructure projects.
• 🎯 These taxes are collected every time a purchase is made, supporting essential services like roads, bridges, schools, parks, and libraries.
• 📊 For states, sales tax revenue constitutes about a third of their income, and it's also a significant component for local governments, particularly for funding mass transit and other local infrastructure.

Sales Tax Variations Across States

• ⚠️ Not all states have sales taxes; five states (New Hampshire, Delaware, Oregon, Montana) currently have none.
• 📈 States without income taxes, such as Florida and Tennessee, often have higher sales tax rates, typically 6% or more.
• ⚖️ When combining state and local sales taxes, rates generally fall around 7.5%, but this varies significantly by jurisdiction.

Investor Considerations for Sales Tax Bonds

• 💰 Sales tax bonds generally offer higher yields compared to general obligation bonds.
• 🔍 Investors should look for minimum debt service coverage to ensure sufficient revenue for principal and interest payments.
• ⚖️ An additional bonds test is crucial to prevent municipalities from overleveraging the sales tax revenue stream.

Assessing Bond Resilience and Pledges

• 🛡️ Resiliency is assessed by examining bond performance during economic downturns like COVID-19 and the Global Financial Crisis (GFC).
• 🌐 A broader tax pledge, covering a wider range of services and points of sale, is considered safer than narrow taxes (e.g., a state liquor tax).
• 📊 Narrower taxes require more over-collateralization due to their inherent variability and less predictable revenue streams.