Supreme Court Justices Lean Towards Keeping State Bond Tax Breaks

by Philip Morton, Investors Offshore.com

08 November 2007

US Supreme Court justices have this week indicated that they may uphold tax breaks offered by dozens of states on municipal bonds.

Observers have suggested that such a decision would be welcomed by state authorities, as the alternative would cause colossal disruption in the $2.5 trillion muni bond market if the court chose to overturn the practice.

Ruling in the case of the Department of Revenue of Kentucky vs. Davis, the court must reach a conclusion as to whether Kentucky can allow tax breaks on interest from municipal bonds sold within its borders, while taxing interest earned on bonds sold in other states.

Chief Justice John Roberts announced, according to a Bloomberg report, that: "This is an area where Congress can regulate if it wants to, and it has never shown the slightest interest in interfering with state tax exemptions for their own bonds.''

Justice John Paul Stevens reportedly responded by observing that:

"The victims under your approach are the 49 other states, and all of them seem to support your opponent," a reference to a court brief filed by the 49 states in support of Kentucky.

Justice Anthony Kennedy has reportedly commented: "All states want to protect their residents and make it look like they're doing something for their residents. And that's exactly the purpose of commerce clause prohibition against explicit discrimination, which is what this is."

According to the national media, Justice David Souter hinted at worries about the impact that reversing such a widespread practice would have, concluding that: "We have an enormous market, the effect of interrupting which we really, as a court, cannot tell very much, and that seems to me a very good reason to give the nod to Kentucky."

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