The doom and gloom picture state officials paint in their arguments against forcing states to treat in-state and out-of-state muni bond the same way are overblown, plaintiffs in the closely watched Davis v. Kentucky case say.
In a new brief filed just as oral arguments are set to begin before the U.S. Supreme Court, the Davises assert that treating the bonds the same way wouldn’t harm the bond market or Kentucky’s ability to carry out its capital programs.
Supreme Court arguments are set to begin Nov. 5 in the high-stakes case.
So far, the Davises have prevailed in court. A Kentucky appeals court agreed with them that treating the bonds differently amounted to a violation of the “dormant” commerce clause of the U.S. Constitution. Either all bonds must be taxed, or all left untaxed, the appeals court ruled. The Kentucky Supreme Court declined to hear the case, but the U.S. Supreme Court will.
Davises have formidable opposition.
Nine “friend of the court” briefs have been filed by the financial community, other states’ attorneys general and associations of local governments supporting Kentucky’s bid to uphold current practices. Mutual fund companies with single-state funds especially would feel the impact of a decision favoring the Davises, and argue it would disrupt a well- established market for municipal bonds.
The Davises, in their new brief, sought to rebut Kentucky’s assertion that its sovereign status as a state makes it substantially different from other states, necessitating separate rules for in-state commerce. The Davises argue that states are similar and that bonds regularly trade across state lines. Other arguments by Kentucky seeking to establish its uniqueness, and the need to treat its bonds differently, are also dismissed by the investors.
The Davises’ strongest argument appears to be their assertion that equal tax treatment will not cause any bonds to default, public projects to be cancelled or have other harmful effects on the ability of Kentucky to carry out its capital programs.
Davis supporters point to Florida, which no longer has an intangibles tax and serves as an example of a market for tax-exempt bonds where both in-state and out-of-state bonds have equal tax status.
Kentucky and its supporters have one last opportunity to file a response, and then must prove its case in person to the Supreme Court. Currently, legal experts are split on how the Supreme Court will rule. Oral argument may give a sense as to how individual justices lean. A decision is likely next spring.