Software Nerd

Wednesday, April 09, 2008

The SCOTUS ponders Muni-bond exemptions

U.S. States are not supposed to favor in-state companies over out-of-state ones. This fits with the spirit of the constitution, and is referred to as the "dormant commerce clause". States do violate this, but usually with some type of excuse. So, for instance, a state might prevent internet-based liquor purchases, and say it's to protect minors.

There is an area where states routinely give themselves a preferences, and that is in municipal bonds. The interest on these bonds is exempt from Federal Income tax, but states typically only exempt interest on municipla bonds of their own state. Consequently, one has municipal bond funds that invest in the bonds of a single state.

Someone decided to question this, and a Kentucky court ruled the preference for in-state bonds as unconstitutional. The case is at the SCOTUS now. The best guess seems to be that the SCOTUS will let states favor themselves, holding this not to be a case of favoring an in-state business.

However, Justices Souter and Alito threw out a question about municipal bonds that are for private purposes. According to this Bloomberg article, such bonds represent 25% of all muni-bonds. "They finance mortgages, student loans, small-scale industrial projects, airports, hospitals, redevelopments and a variety of other causes."

Justice Ginsburg suggested that since the current case is not about private-use bonds, the SCOTUS could say that the preferential treatment was okay, and simply keep silent about whether it would be okay for private-purpose bonds.

Wouldn't it be nice to have at least one justice who asks: "wait a minute, are private-purpose bonds constitutional in the first place?"


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