Can Discriminatory State Taxation of Munipical Bonds Be Justified?

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Publication Date

October 2007


This report continues the authors’ 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 nearly all other states with an income tax) of taxing interest on federally exempt bonds issued outside the state while exempting its own municipal bonds from taxation.

In this report, they skeptically evaluate several possible state interests that might be offered to justify that practice. For example, they point out that Kentucky’s assertion that the policy conserves state revenue is wrong. They also argue that if the goal is to transfer revenues from the state to local governments, exemption is inferior to direct grants.

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