Every other state in the nation has lined up behind Kentucky’s effort to maintain its ability to tax residents’ income from out-of-state bonds while exempting its own.
Eight groups, including state treasurers, attorneys general, mutual funds and others, filed supporting briefs in the case before the Supreme Court. States support the status quo because current law compels residents to purchase bonds issued in their respective states. Industry groups also support Kentucky. They argue that eliminating state tax preferences would disrupt widely recognized bond sales and distribution practices.
Briefs favoring the investors are due later in August.
The case, Kentucky v. Davis, was brought by investors who reside in Kentucky. They are suing to gain equal tax treatment for all municipal bond investments, regardless of whether they were issued in Kentucky or elsewhere. Currently, more than 40 states do not tax municipal bonds issued within their states, while they do tax out-of-state issues.
In its brief, Kentucky argued that each state is different and can only issue debt for its state and local governments. Kentucky maintained that its sovereign status allows it to use state tax laws as a means to stimulate bond issuance to further public purpose projects.
After further filings, it is expected that the Supreme Court will hear oral arguments in October with a decision prior to the next term’s end in June 2008.