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Extending United Haulers to Fit Davis: Tax Exemptions as a Downstream 'Flow Control' Device

38 Pages Posted: 14 Aug 2007  

Dan Ray


Date Written: August 8, 2007


Kentucky, like most states, exempts from state income taxation the interest income on municipal bonds issued by Kentucky and her political subdivisions. Interest on out-of-state municipal bonds is fully taxable under Kentucky law. Does this disparity in state income tax treatment violate the dormant Commerce Clause? In Davis v. Kentucky, the Kentucky Court of Appeals said "yes." The United States Supreme Court will review Davis during the October 2007 Term.

The outcome in Davis is likely to turn on whether the Court decides to extend its recent decision in United Haulers Association, Inc. v. Oneida-Herkimer Solid Waste Management Authority, 127 S. Ct. 1786 (2007). There, the Court decided that when a government regulates to favor its own market participation undertaken to perform a "traditional" governmental function, and when it is motivated by legitimate interests and not economic protectionism, the government does not discriminate against interstate commerce as long as all private competitors are treated identically.

Professors Yale and Galle argue, in Municipal Bonds and the Dormant Commerce Clause After United Haulers, 115 Tax Notes 1037 (2007), that the Court should affirm the Kentucky Court of Appeals. United Haulers is inapplicable, they say, because Kentucky is discriminating not against private competitors, but against similarly-situated public competitors who also sell municipal bonds. Kentucky's tax exemption is thus protectionist and unconstitutional.

I believe the Court will take a different view. When Kentucky enters the capital market to borrow funds, it is engaged in a traditional governmental function. Kentucky's tax exemption is not protectionist; it advances a legitimate government interest in having an adequate supply of capital to finance public works. The Court will extend United Haulers for two reasons. First, United Haulers implicitly sanctions this outcome. Second, the Court will see no need for a different result just because public competitors are disadvantaged.

Keywords: constitution, commerce clause, dormant Commerce Clause, market participant, municipal bonds

Suggested Citation

Ray, Dan, Extending United Haulers to Fit Davis: Tax Exemptions as a Downstream 'Flow Control' Device (August 8, 2007). Available at SSRN: or

Daniel R. Ray (Contact Author)

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