Practical Consequences, Institutional Competence, and the Kentucky Bond Case

Abstract:     
On November 5, 2007, the Supreme Court will hear arguments in Department of Revenue of Ky. v. Davis. At issue is whether state income tax preferences for their own municipal bonds impermissibly discriminate against interstate commerce. This article makes two basic arguments as to why the Court should find such preferences constitutional. First, as a doctrinal matter, Davis is essentially indistinguishable from the Court's decision last term in United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste Mgmt. Auth. There, the Court held that laws that "favor the government," that "treat every private business. . . exactly the same," and that concern "a traditional government activity," "do not discriminate against interstate commerce for purposes of the Commerce Clause." State tax preferences for in-state municipal bonds meet all three of these criteria. Second, and more importantly, a decision by the Court in Davis to invalidate these tax preferences would force the 42 states that have enacted these preferences to endure billions of dollars in losses transitioning to a system where all municipal bonds are taxed equally. And these costs would all be attributable to the states' need to honor commitments that they made when they reasonably believed that the preferences were constitutional. Congress, however, could avoid these transition costs by crafting a remedy that applied purely prospectively to municipal bonds that have not yet been issued. Thus, even if interstate commerce would benefit from the states' equal taxation of municipal bonds, there are strong pragmatic reasons for the Court to stay its hand and ratify the status quo. As it has done in several other important state tax cases, the Court should recognize the superior institutional competence of Congress in sorting out the details of a complicated economic question with huge fiscal ramifications.

Accepted Paper Series