When States Discriminate: The Non-uniform Tax Treatment of Municipal Bond Interest

• Published in: Public administration review Vol. 69; no. 3; pp. 458 - 468
• Main Authors: Denison, Dwight V., Hackbart, Merl, Moody, Michael J.
• Format: Journal Article
• Language: English
• Published: Oxford, UK Blackwell Publishing Ltd 01.05.2009; Wiley Subscription Services; American Society for Public Administration
• Subjects: Bond funds; Bond issues; Bond markets; Borrowing; Capital costs; Commerce clause; Constitutional courts; Debt financing; Discrimination; Federal states; Federal taxes; Finance; Finance Reform; Fiscal Policy; Fostering Fiscal Responsibility: International, Federal, and Local Government Perspectives; Government bonds; Income taxes; Interest income; Jurisdiction; Kentucky; Law; Loans; Local finance; Local government; Market segmentation; Municipal bonds; Municipal taxes; Personal income; Personal income taxes; Revenue; State budgets; State court decisions; State income tax; States (Political Subdivisions); Studies; Subsidies; Supreme Court decisions; Tax exempt organizations; Tax exemptions; Tax incentives; Tax preferences; Tax rates; Tax systems; Taxation; Taxes; U.S.A; United States of America; Yield; United States > US
• ISSN: 0033-3352; 1540-6210
• DOI: 10.1111/j.1540-6210.2009.01992.x

There is a long history of states using tax systems to encourage residents to invest in bonds issued by jurisdictions within their state. This preferential or discriminatory tax trèatment was ruled unconstitutional in 2006 by the Kentucky Court of Appeals. The Kentucky court decision, which sets the stage for this essay, was overturned by the U.S. Supreme Court in 2008. This essay addresses the possible implications of this and similar discriminatory tax policies. Such discriminatory policies are the foundation of the municipal bond market, and altering the practice would have significant implications for revenue collections and borrowing costs in most states and localities. While the Supreme Court's position has been rendered, the case has caused policy makers and administrators to scrutinize discriminatory tax policies and their impact on budgets and borrowing costs.