Mon, May 19, 2008
Kentucky versus Davis decision: No Changes for Muni Bonds or 529s
Listen carefully, and you can hear the $2.6 trillion municipal bond market breathe a sigh of relief. Today the U. S. Supreme Court annouced its ruling in DEPARTMENT OF REVENUE OF KENTUCKY ET AL. v. DAVIS ET UX. It concluded, in a 7-2 decision, that it is not unconstitutional for a state to give favorable tax treatment to owners of its own municipal bonds while not doing so for holders of bonds issued by other states. In an earlier post, I discussed how a different decision in this case would have affected not only municipal bonds but also 529 college savings plans.
As noted in this article in Bloomberg, forty-two states currently offer state income tax exemptions on the interest from their bonds. All forty-nine of the other states joined Kentucky in urging the court not to change the existing muni bond system, and a majority of the justices agreed that these laws do not discriminate against interstate commerce. The court left open the question of whether private-activity bonds violated the constitution, though the language of the decision seemed to suggest that a change in the treatment of such bonds would be unlikely even if the question had been before the court.
This puts to rest any remaining uncertainty for the muni bond market on this matter, although there had been strong suspicions that the Supremes would not upset the apple cart with a sudden change in the law. Indeed, the majority opinion, written by Justice David Souter, noted that a change in the current laws would ``upset the market in bonds and the settled expectations of their issuers.’’ There seemed to be little effect on the prices of muni bonds today, suggesting that the market had indeed been expecting such an outcome.
The morbidly curious may view all the details via this link to the Kentucky v. Davis decision at the Supreme Court’s web site.
