Paul L. Caron

Monday, May 21, 2007

Supreme Court Grants Cert in Davis, Which Prohibits Tax Exemption for In-State Municipal Bond Interest

The Supreme Court today granted certiorari in Department of Revenue v. Davis, No. 06-666.  In Davis v. Kentucky, 197 S.W. 3d 557 (2006), the Kentucky Court of Appeals held unconstitutional under the dormant commerce clause Kentucky's tax exemption of interest on Kentucky state & local bonds, but not interest on out of state bonds.

Also on the Davis front:  Ethan Yale (Georgetown) & Brian Galle (Florida State) have posted their forthcoming article, Municipal Bonds and the Dormant Commerce Clause After United Haulers, 114 Tax Notes ___ (5/29/07), on SSRN.  Here is the abstract:

This Report considers the constitutionality of the common state practice of exempting interest on the state's own municipal bonds from taxation but imposing tax on municipal bonds issued in other states. In particular, we weigh the impact of a recent Supreme Court decision, United Haulers, on challenges to those statutes, including one suit, Davis v. Kentucky, in which a petition for certiorari is now pending. In United Haulers the Court held that a municipal ordinance didn't violate the Dormant Commerce Clause because the ordinance operated as a preference for a government-owned facility. United Haulers might save from constitutional invalidity state tax laws favoring in-state municipal bonds, but we doubt it. Although United Haulers lifts the presumption of unconstitutionality from laws favoring state-run businesses in competition with private business, we argue that the Court should remain skeptical of discriminatory laws that shield state officials from the pressure of competition with activities undertaken by other states. We predict that, if constitutional law remains as it stands, state laws exempting only in-state municipal bonds will be found to violate the Dormant Commerce Clause. If we are wrong and state tax laws favoring in-state municipal bonds are shielded by United Haulers, it will mark a significant extension of the nascent state-run business exception to the Dormant Commerce Clause.

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