Justices OK Tax Breaks For Municipal Bonds

WASHINGTON (CN) - The state of Kentucky did not discriminate against interstate commerce when it exempted instate bonds from income taxation, the U.S. Supreme Court ruled in a 7-2 decision.

Kentucky residents George and Katherine Davis had sued Kentucky's Department of Revenue over the practice after paying income tax on out-of-state bonds.

The trial court ruled in the state's favor, but the appeals court ruled that the state had violated the Commerce Clause's limit on regulation.

The high court justices disagreed, ruling that the state did not violate the Commerce Clause. Justice Souter cited the century-long history of the taxation practice, which is used by 41 states.

Souter also noted that state bonds support long-term municipal improvements that may not be picked up by interstate bonds.

"The state's unanimous desire to preserve the scheme is a far cry from private protectionism," he wrote.

The majority ruled in favor of the state, with Justices Kennedy and Alito dissenting.

"Even if today's decision is welcomed by those who profit from discrimination," they argued, "the system as a whole would benefit from a return to a market with proper form, freed from artificial restraint."

Subscribe to Closing Arguments

Sign up for new weekly newsletter Closing Arguments to get the latest about ongoing trials, major litigation and hot cases and rulings in courthouses around the U.S. and the world.

Email *

Submit