May 19, 2008
State Legislators Applaud Supreme Court for Upholding Tax Exemptions for Municipal Bonds
Kentucky law does not violate Constitution's commerce clause, court finds
WASHINGTON - In a case that potentially had far-reaching implications for states, the U.S. Supreme Court upheld a Kentucky law allowing states to collect tax on out-of-state bonds while maintaining tax exemption on their own municipal bonds.
Last year, the National Conference of State Legislatures submitted a "friend of the court" brief on this case, Kentucky v. Davis, brought by a couple from Kentucky who were challenging the constitutionality of having to pay income tax on out-of-state bonds. While interest on a bond issued by Kentucky or Louisville is exempt from state income tax in Kentucky, interest earned by the same taxpayer on an Ohio or Cleveland bond is not exempt from Kentucky income tax.
The Supreme Court held that issuing debt securities to pay for public projects is a "quintessentially public function, with a venerable history."
"The issue affects the overwhelming majority of the states," said William T. Pound, NCSL executive director. "In uncertain economic times for many states, these tax-free bonds provide funding for critical infrastructure projects that might otherwise go unfunded. Any significant interference by the Supreme Court with the tax schemes that exist in almost every state would disrupt the bond markets."
Kentucky is one of 40 states that tax interest earned on bonds issued by other states as income while exempting interest earned on their own bonds. Four other states exempt interest on some bonds issued by them or their political subdivisions while taxing interest on all bonds issued by other states and their political subdivisions.
NCSL, in its amicus brief, cited long-term debt obligations as an essential source of funding for state and local governments. State governments rely heavily on borrowed funds to finance education, road construction, and utilities. Governmental operations will be hindered severely if the cost of capital rises, according to the brief filed last year.
NCSL policy experts and state legislators are available for media interviews to discuss the implications of the Supreme Court ruling. For more information, log on to the NCSL press room.
NCSL is the bipartisan organization that serves the legislators and staff of the states, commonwealths and territories. It provides research, technical assistance and opportunities for policymakers to exchange ideas on the most pressing state issues and is an effective and respected advocate for the interests of the states in the American federal system.
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