Paul L. Caron

Saturday, February 5, 2011

Municipal Bonds and the Erosion of Dormant Commerce Clause Scrutiny in Davis

Evan S. Weiss (J.D. 2011, Washington University) has published Fixed Income Insecurities: Municipal Bonds and the Erosion of Dormant Commerce Clause Scrutiny in Department of Revenue v. Davis, 33 Wash. U. J.L. & Pol'y 329 (2010). Here is the Conclusion:

The Kentucky tax scheme, shared by forty other states, is discriminatory on its face but not in effect. It does not actually place all the burdens outside the state while reserving all the benefits for inside the state. Granted, the tax regime is attractive to investors and causes some balkanization of the municipal bond market. The states, however, pay a significant cost to sustain the tax regime, because the tax revenues they forego exceed their savings from lower interest rates and result in government waste. That cost is born by every constituent within each state utilizing the scheme, in the form of either higher tax rates or reductions in services.

Even if the tax scheme was discriminatory, the Court‘s concern that the scheme is designed to support important government functions could properly have been addressed by the Hunt balancing test for discriminatory state regulations. If the Court felt the state‘s fundraising interests outweighed the national interest in a unified national market for municipal bonds, it could have stated as much. Moreover, the Court could have argued that the statutory scheme is so pervasive that if Congress had wanted to put an end to the practice it would have legislated it out of existence.

Rather than take either of these approaches, the Court unnecessarily created a lower standard of review for all state legislation that can be construed as supporting government functions. Such a sweeping exception could have dramatic consequences for interstate commerce and the national market. At the very least, the exception will likely embolden states to enact legislation that they previously would not have due to concerns that their regulations might not withstand judicial scrutiny. The Court thus eliminated an important check on state legislatures for preserving the federal balance of power. Then again, perhaps shifting the federal balance of power was the very purpose of the Davis opinion.

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