Summary: 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.
