What is the purpose of a dedicated tax in the context of revenue bonds?

A dedicated tax serves a crucial role in the context of revenue bonds by specifically securing those bond issues. When a government entity issues revenue bonds, they are typically financing specific projects or programs that generate income, such as toll roads or utility services. The revenue generated from these projects is expected to be sufficient to cover the bond repayments. A dedicated tax ensures a reliable revenue stream, effectively linking that tax revenue directly to the bond repayment.

This arrangement provides bondholders with assurance that there is a consistent source of funds available for servicing the debt, thus enhancing the credibility and attractiveness of the bonds to investors. By tying the revenue from the dedicated tax to the repayment of the bonds, it alleviates concerns about the potential use of general funds, making those bonds less risky and more secure for investors.