Municipal Bond Forum
On Court to Hear Landmark Case on Out-of-state Bonds
Q
If the Supreme Court rules in favor of the investors, and a state then decides to tax all bonds including its own in-state issued bonds purchased by residents of that same state, how will that effect tax-free interest currently being received from that state’s previously purchased tax-free bonds? Will that state’s previously purchased tax-free bonds then be subject to tax by that state? Will currently tax-free interest then be taxed? Or would the tax go into effect only on bonds/interest purchased after a decision to tax them is announced?
A
James A. Klotz responds:
At this time, it is too early to know how such a scenario would play out. If the investors were to ultimately win this suit, and a state decides to make the interest on all bonds taxable, it would be up to the state to decide how to implement such requirements. It is entirely possible that different states could make different decisions on this. We will just have to wait and see what happens.
Since the basic issue of equal treatment of in-state and out-of-state bonds has yet to be decided, the states themselves are unsure of how the Supreme Court will rule, and what the implications of any such ruling will be.
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