In Kentucky v. Davis, the United States Supreme Court upheld the long-established practice of many states which tax bond interest from other states but exempt from their state income tax interest on in-state bonds. The Court’s 7-2 decision, issued on May 19, 2008, has the effect of avoiding disruption of the municipal bond market.
Kentucky’s income tax law taxed interest on bonds issued by other states and their subdivisions but exempted interest on bonds issued by the State of Kentucky and its political subdivisions. The issue before the Supreme Court was whether this violated the Commerce Clause found at Article I, §8 of the United States Constitution, which expressly empowers Congress to regulate “Commerce . . . among the several States . . . .” The Supreme Court has considered that this express grant of power to Congress requires, by implication, a “dormant Commerce Clause” prohibition on state laws that discriminate against interstate commerce. A “market participant exception” to the restrictions imposed on the states by the dormant Commerce Clause applies when a state or local government actually participates in a market rather than merely regulating other market participants.
The majority opinion, written by Justice Souter, emphasized that Kentucky’s law favoring in-state bonds related to “a quintessentially public function, with a venerable history” and involved Kentucky’s direct market participation. The majority opinion concluded that no “traditionally forbidden discrimination” against interstate commerce was involved because Kentucky’s law did not create “a commercial advantage for goods or services marketed by local private actors”, but instead involved state government carrying out civic objectives.
By Arthur F. Owens (aowens@dickinsonlaw.com)
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Posted by: rechtsanwalt schweiz | Sunday, June 22, 2008 at 02:51 AM