Private Activity Bonds (PABs)

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on September 01, 2023

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What Is Private Activity Bonds?

Private Activity Bonds (PABs) are a unique financing mechanism that enables private entities to access tax-exempt debt for projects that serve a public purpose. These bonds play a crucial role in funding infrastructure projects across the United States.

History and Background of Private Activity Bond

Private activity bonds have evolved over time as the needs for infrastructure financing have changed. Legislation and regulations have shaped the landscape for these bonds, with two key pieces of legislation playing a significant role.

Tax Reform Act of 1986

The Tax Reform Act of 1986 established private activity bonds as a separate category of tax-exempt bonds. It also imposed limits on the issuance of PABs and defined qualified projects eligible for this type of financing.

Tax Cuts and Jobs Act of 2017

The Tax Cuts and Jobs Act of 2017 retained the tax exemption for private activity bonds, despite initial proposals to eliminate it. This decision reinforced the importance of PABs in financing critical infrastructure projects.

Types of Private Activity Bonds

There are several types of private activity bonds, each catering to specific sectors and purposes.

Exempt Facility Bonds

Exempt facility bonds are used to finance various types of projects, including:


These bonds finance the construction and improvement of airport facilities.

Mass Commuting Facilities

Exempt facility bonds can also fund mass commuting facilities like public transportation systems and rail networks.

Residential Rental Properties

These bonds support the development of affordable housing projects for low- and moderate-income households.

Water and Sewer Facilities

Exempt facility bonds can finance the construction and maintenance of water and sewer infrastructure.

Qualified Mortgage Bonds

Qualified mortgage bonds provide financial assistance to first-time homebuyers, enabling them to secure low-interest mortgage loans.

Qualified Redevelopment Bonds

These bonds fund projects that aim to revitalize economically distressed areas through redevelopment efforts.

Qualified 501(c)(3) Bonds

These bonds cater to nonprofit organizations, allowing them to access tax-exempt financing for eligible projects.

Types of Private Activity Bonds

Eligibility and Issuance Process

Issuers and Recipients

State and local governments typically issue private activity bonds, while private entities, such as businesses or nonprofit organizations, are the recipients.

Qualifying Projects and Activities

Projects eligible for private activity bond financing must serve a public purpose, such as infrastructure development, affordable housing, or pollution control.

Approval and Allocation Process

Projects seeking PAB financing must obtain approval from the appropriate governmental authority and follow a strict allocation process, which includes meeting certain requirements and complying with regulations.

Tax Exemption Status and Limitations

Interest earned on private activity bonds is generally exempt from federal income taxes. However, there are limitations and exceptions, such as the Alternative Minimum Tax (AMT).

Benefits of Private Activity Bonds

Financial Advantages for Borrowers

PABs offer lower interest rates than conventional financing, making them an attractive option for private entities looking to fund eligible projects.

Stimulating Economic Growth and Development

Private activity bonds can spur economic growth by providing funding for critical infrastructure projects that create jobs and enhance communities.

Public-Private Partnerships

PABs foster collaboration between the public and private sectors, leveraging the strengths of both to achieve shared goals.

Social and Environmental Benefits

Many private activity bond-funded projects generate positive social and environmental outcomes, such as affordable housing, pollution control, and improved public transportation.

Criticisms and Controversies

Potential for Misuse and Abuse

Critics argue that PABs can be misused, with private entities benefiting from tax exemptions without providing adequate public benefits.

Inequitable Distribution of Benefits

Some argue that the benefits of private activity bonds are disproportionately concentrated among wealthier individuals or corporations, exacerbating existing inequalities.

Tax Exemption Concerns

There is an ongoing debate about the appropriateness of providing tax exemptions for private activity bonds, with some arguing that the lost tax revenue could be better utilized elsewhere.

Public vs. Private Interests

Critics contends that private activity bonds can blur the line between public and private interests, potentially leading to conflicts or undermining public objectives.

Benefits and Criticisms of Private Activity Bonds

Future of Private Activity Bonds

Recent Trends and Developments

The use of private activity bonds for financing infrastructure projects continues to grow, reflecting their importance as a funding source in the face of constrained public budgets.

Potential Legislative and Regulatory Changes

Future legislation and regulatory changes could impact the role of private activity bonds in infrastructure financing, either by expanding their scope or imposing new restrictions.

Innovations and New Applications

As new needs and opportunities emerge the scope of private activity bonds may evolve to include innovative financing solutions for emerging industries and sectors.

Challenges and Opportunities

The future of private activity bonds will be shaped by the balance between addressing concerns and criticisms while leveraging the benefits they provide in funding essential infrastructure projects.


Private activity bonds play a significant role in financing critical infrastructure projects across the United States.

Their unique structure enables private entities to access tax-exempt financing for projects that serve a public purpose.

While there are valid concerns and criticisms, PABs offer numerous benefits, including stimulating economic growth, fostering public-private partnerships, and addressing social and environmental challenges.

The future of private activity bonds will be influenced by ongoing debates, potential legislative changes, and emerging opportunities in infrastructure financing.

Private Activity Bonds (PABs) FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.

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