City Council: Cities may issue municipal bonds to fund public projects

Question

City Council: Cities may issue municipal bonds to fund public projects. Because the interest paid to the bond holder is tax-exempt, municipal bonds are an attractive investment. So, to pay for the five state-of-the-art school buildings needed to accommodate our growing student population, Northopolis should issue a ten-year, $200 million bond, thereby paying for the buildings with revenues from an expanding tax base.
 
Which of the following, if true, casts the most serious doubt on the likelihood that the bond issue recommended above will have the result that is claimed?

(A) Most Northopolis citizens would be reluctant to support a tax increase to pay for new school buildings.

(B) Because municipal bond interest is tax-exempt, bond issues can severely affect a city's tax revenues for the life of the bond, despite the short-term benefits.

(C) Many popular investments are created by pooling state and municipal bonds to create tax-exempt index funds.

(D) Estimates of the cost of five new school buildings vary from well below $200 million to well above $200 million.

(E) A significant percentage of municipal bonds issued by cities such as Northopolis are purchased by investors from other cities who aim to diversify their bond portfolios.

gauravnagpal · Answer

regards
P S -- must be a question from LSAT or Kaplan

Pavle · Answer

Yes it can affect a city's tax revenues but how it's connected with conclusion that bounds might not generate revenue??

gautrang · Answer

After a lot of POE, B it is.

The conclusion is:

thereby paying for the buildings with revenues from an expanding tax base.

B said:

bond issues can severely affect a city's tax revenues for the life of the bond

The city hoped to build the schools with a lot of revenues. B points out a reason that the revenues will not be as much as the city expected.

rlevochkin · Answer

Seems like the argument is based on the assumption that a $200 million bond is not significant enough to cause any changes in an expending tax base. However, B states the the possibility that this bond issue can severly affect the city's tax revenues in either positive or negative ways. In case of the latter, A bond issue can even preclude a tax revenue base from expanding making the bond issue really inattractive as a financing alternative.

amp0201 · Answer

(B) Because municipal bond interest is tax-exempt, bond issues can severely affect a city's tax revenues for the life of the bond, despite the short-term benefits.

Because, the interest earned on the municipal bonds is tax-exempt, eventually government is losing that money and causing the tax revenues to decrease.

Hence B for me.

avohden · Answer

This question is from GMAT HACKS daily question of the day archive. I'm not sure when this question originally appeared on Jeff Sackmann's site but it reappeared on March 19, 2013. Here is the link to the question from 2013  https://www.gmathacks.com/daily/20130319-gmat-question-of-the-day.html .

The Official Explanation is as follows:

Answer: B  This is a weaken question. The argument makes a rather odd claim. Much of the passage concerns the benefits of municipal bonds, including a suggesting that Northopolis issue such a bond. Then the conclusion is that the city will pay for new school buildings with tax revenues. Money from bond issues is not the same thing, so it's unclear what one has to do with the other. To weaken the argument, that distinction--the assumption that issuing a bond will somehow increase tax revenues--must be made clear. Consider each choice:

(A) This is irrelevant, as it doesn't address either the bond issue or the effect of "reluctance" on tax revenues.  (B) This is correct.  It relates the existence of the proposed bond issue to tax revenues, which would decrease as a result of the bond issue. (C) This is irrelevant, as it doesn't address tax revenues. (D) Again, this choice is irrelevant; the cost of the buildings is not what the conclusion of the argument is about. (E) This is outside of the scope. If anything, it weakens the argument by suggesting that the bond issue will not have a direct impact on local finances.

NOTE:  I added additional Tags to the question as there was only one field used.

pafrompa · Answer

Could someone please breakdown B vs E?

ankujgupta · Answer

Even though I got the correct answer. But still need to validate my understanding here. The conclusion is that City will pay for its schools with revenues from expanding tax base. But since, these bond's interest is tax free, they might not serve the purpose. Which is mentioned in B

sayantanc2k · Answer

Your query has been well explained by ankujgupta in the above post.

E is irrelevant, because it does not relate to tax. Moreover, this option states a strength of such bonds, whereas the correct option should mention a weakness (specifically, related to tax).

askul2389 · Answer

could you please elaborate more why option B is correct?

sayantanc2k · Answer

Option B states that the bond interest is  tax-exempt . Therefore this option states a point against the argument based on "paying for the buildings with revenues from an  expanding tax base ". Thus B is correct. (The two underlined portions oppose each other.)

sakshamgmat · Answer

I agree on this but one thing that is confusing is that the statement " the bond interest is tax-exempt" is mentioned in the premise of the argument and not introduced newly in the option B.

Also, the conclusion about paying for the buildings from an expanding tax base dos not follow from the premises in the argument as the argument clearly states that the bond interest is tax free .

How does B weaken the argument if the tax free point is already mentioned in the premise of the argument ??

sayantanc2k · Answer

The passage uses the part "tax exempt" to show why there would be more buyers and then concludes (wrongly) that more buyers would mean increase in tax base (absolutely ignoring the first cause-effect relation): tax exempt---> more buyers ---> increase in tax base.

Option B shows the problem in the above argument, showing that the same feature "tax exempt" would not help increase the tax base.

(Cannot say that this is a very high quality GMAT-like question.)

chesstitans · Answer

this question is not hard to understand, and nothing is strange here.
Nevertheless, test takers will not use outside knowledge or any analytic skills for this question.
Here is an idea: growing population -> more tax revenues for the city. However, people want tax exempt -> put in munical investment -> the fund is used to build the school.

For gmat, C,D,E are all out of scope.
In A, people from other parts of the world still buy the bonds, and there is no need to increase the tax to build the school. B is left.
THe argument structure is clear even though the structure is confusing.

aaba · Answer

Yes, B is the answer.
the argument says that "because of expanding tax base, people will hold bonds, and also the city will receive more tax revenues; as a result, the city will have the fund to build the school."
B points out that "that many people choose to hold bond will negatively affect the tax revenues"

VerbalBot · Answer

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City Council: Cities may issue municipal bonds to fund public projects

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