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Private Capital and Public Purposes: Discriminatory State Taxation of 'Private Activity Bond' Income after Davis


Walter Hellerstein


University of Georgia School of Law

Eugene W. Harper Jr.


Squire, Sanders & Dempsey LLP

November 1, 2008

UGA Legal Studies Research Paper No. 08-009

Abstract:     
In its 2008 decision in Department of Revenue v. Davis, the U.S. Supreme Court dismissed Commerce Clause objections to the states' widespread practice of exempting interest from in-state - but not out-of-state - municipal bonds. However, it left "for another day" consideration of "any claim that differential treatment of interest on private-activity bonds should be evaluated differently from the treatment of municipal bond interest generally." This article argues that the day for judicial evaluation of the constitutionality of private activity bonds in light of Davis should never come. Part I of the article briefly reviews Davis. Part II describes the universe of municipal bonds in general and private activity bonds in particular. Specifically, it provides an historical overview of the municipal bond market and the federal tax exemption for such bonds; it offers an economic perspective on the municipal bond market, focusing on the market failures to which municipal bond financing often responds; and it examines the federal statutory framework governing exemption of private activity bond income. Part III considers the challenges courts will face when, as, and if they are compelled to apply post-Davis doctrine to private activity bonds in an effort to determine their constitutionality. It concludes that this judicial inquiry is a virtually hopeless task for both conceptual and factual reasons. Part IV explores nonjudicial alternatives to the resolution of the constitutionality of state tax discrimination in favor of states' own private activity bonds that would avoid the legal uncertainty that will otherwise hover over the existing state tax treatment of this multibillion dollar market for years to come.

Number of Pages in PDF File: 54

Keywords: Taxation, private activity bonds, Davis

JEL Classification: K34

working papers series


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Date posted: November 17, 2008 ; Last revised: March 5, 2009

Suggested Citation

Hellerstein, Walter and Harper, Eugene W., Private Capital and Public Purposes: Discriminatory State Taxation of 'Private Activity Bond' Income after Davis (November 1, 2008). UGA Legal Studies Research Paper No. 08-009. Available at SSRN: http://ssrn.com/abstract=1301081 or http://dx.doi.org/10.2139/ssrn.1301081

Contact Information

Walter Hellerstein (Contact Author)
University of Georgia School of Law ( email )
209 Hirsch Hall
Athens, GA 30602
(706) 542-5175 (Phone)
(706) 542-5556 (Fax)

Eugene W. Harper Jr.
Squire, Sanders & Dempsey LLP ( email )
Cleveland, OH
United States
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