Supreme Court Upholds Tax Exemption for In-State Muni Bonds
Updated: The U.S. Supreme Court has ruled that states may favor municipal bonds issued within their borders by exempting interest on them from taxation, SCOTUSblog reports.
The appeal in Kentucky v. Davis had argued Kentucky violated the Constitution’s dormant commerce clause by exempting interest on in-state municipal bonds from taxation while taxing income from out-of-state bonds.
Justice David H. Souter wrote in a 7-2 decision (PDF posted by SCOTUSblog) that the differential tax scheme does not discriminate against interstate commerce in violation of the commerce clause.
Souter wrote that the tax scheme “is a far cry from the private protectionism that has driven the development of the dormant commerce clause.” Souter said governments issue bonds to spread the costs of public projects over time, a quintessential public function motivated by legitimate objectives. As a public entity, Kentucky does not have to treat itself as being substantially similar to other bond issuers in the market, he reasoned.
His opinion, he wrote, is not a “death knell” for all commerce clause challenges.
Forty-two states offer such tax breaks, Bloomberg reports. States had told the court that overturning the system of exemptions that began 90 years ago could have a devastating impact on their finances, the Associated Press reports.
Justices Anthony M. Kennedy and Samuel A. Alito Jr. dissented.
Updated several times to add details from Souter’s opinion.
