Can Discriminatory State Taxation of Municipal Bonds Be Justified?
Tax Notes, Vol. 117, No. 2, October 8, 2007
FSU College of Law, Public Law Research Paper No. 276
FSU College of Law, Law and Economics Paper No. 07-17
7 Pages Posted: 13 Sep 2007 Last revised: 27 Apr 2008
Abstract
This Report continues our analysis of Department of Revenue of Kentucky v. Davis, a case argued in the 2007-2008 Supreme Court term. The issue in Davis is the constitutionality of Kentucky's practice (shared by all other states with an income tax) of taxing interest on federally-exempt bonds issued outside Kentucky while exempting its own municipal bonds from taxation. In this installment we evaluate skeptically a number of possible state interests that might be offered to justify that practice. For example, we point out that Kentucky's assertion that the policy conserves state revenue is wrong. We also argue that, if the goal is to transfer revenues from the state to local governments, then exemption is inferior to direct grants.
Keywords: Dormant Commerce Clause, municipal bonds, fiscal federalism, Pike
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