Can Discriminatory State Taxation of Municipal Bonds Be Justified?
Brian D. Galle
Georgetown University Law Center
University of Virginia School of Law
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
Georgetown Public Law Research Paper No. 1014138
State Tax Notes, Vol. 46, No. 3, October 22, 2007
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.
Number of Pages in PDF File: 7
Keywords: Dormant Commerce Clause, municipal bonds, fiscal federalism, Pike
Date posted: September 13, 2007 ; Last revised: June 23, 2010