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Supreme Court Upholds Municipal Bond Exemption
May 16, 2008
In a 7-2 decision, the U.S. Supreme Court has decided against the Kentucky taxpayers and in the "Davis" case relating to the state tax treatment of interest income from state and local obligations. The Supreme Court found that the practice of exempting municipal bonds issued by jurisdictions within the “home state” only, while taxing municipal bond interest of other states, does not discriminate unconstitutionally in favor of "home state" bonds and securities.
As a result, states can continue imposing income tax on interest from obligations of other states and their local units of government while fully or partially exempting their own.
The holding was widely anticipated in view of the large, adverse fiscal impact on many states and possibly, on national financial markets; and, particularly given the recent disturbance in these markets on account of the mortgage foreclosure crisis.
For the most part, the decision means that "Davis" refund claims that have been prepare for New York State, California, New Jersey and other states, will be rejected by tax authorities.
In the $2.5 trillion municipal bond market, 42 states exempt some or all interest on their bonds from income taxes, while taxing interest on bonds from other states. The states have said that throwing out the system of exemptions that began some 90 years ago would have a devastating impact on state finances.
~ Amper, Politziner & Mattia, State and Local Tax Group |
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