The Supreme Court today agreed to hear an important case on whether Kentucky can tax income from out-of-state bonds while exempting income from in-state bonds.
A decision favoring Kentucky would mean business-as-usual in the tax-free bond market. The case will be widely followed, however, for the far-reaching implications if the investors prevail.
Investors seeking equal treatment
The case, Kentucky v. Davis, was brought by two investors in local courts seeking equal treatment of the income they earned from municipal bonds issued in Kentucky and elsewhere. Courts within Kentucky had ruled in favor of the investors, and the state Supreme Court refused to hear an appeal. Kentucky then sought to have the U.S. Supreme Court resolve the issue.
More than 40 states now give their own bonds tax preference over those issued by others. Depending on the Supreme Court’s eventual ruling, the current system may be left intact, or states will need to either tax or not tax all municipal bonds. Should the latter occur, some states might tax bonds, while others may not.
Attorneys with Ackerman Senterfitt, a law firm with a large public finance practice, believe states may choose to tax their own bonds rather than give up the revenue they are currently collecting. Such a decision, in Ackerman’s view, would also eliminate the advantage of state-specific municipal bond funds. At the same time, states in which issuance is high would lose the benefit they currently enjoy with home-state investors.
The Supreme Court will consider the appeal in its next term, beginning in October.