This report considers the constitutionality of the common state practice of exempting interest on the state’s own municipal bonds from taxation but imposing tax on municipal bonds issued in other states. The authors weigh the effect of a recent Supreme Court decision, United Haulers, on challenges to those statutes, including one suit, Davis v. Kentucky, in which a petition for certiorari was recently granted. The authors say the Court held that a municipal ordinance didn’t violate the dormant commerce clause because the ordinance operated as a preference for a government-owned facility. United Haulers might save from constitutional invalidity state tax laws favoring in-state municipal bonds, but the authors doubt it. Although United Haulers lifts the presumption of unconstitutionality from laws favoring state-run businesses in competition with private business, the authors argue that the Court should remain skeptical of discriminatory laws that shield state officials from the pressure of competition with activities undertaken by other states. They predict that, if constitutional law remains as it stands, state laws exempting only in-state municipal bonds will be found to violate the dormant commerce clause. But they conclude that if they are wrong and state tax laws favoring in-state municipal bonds are shielded by United Haulers, it will mark a significant extension of the nascent state-run business exception to the dormant commerce clause.
Brian D. Galle and Ethan Yale. "Muni Bonds and the Dormant Commerce Clause After United Haulers." Tax Notes 115, no.11 (2007): 1037-1046.