The Municipal Market Goes to Court

Last week, the US Supreme Court agreed to hear a case involving the nation’s municipal bond market, which could lead to profound changes in the $2.3 trillion muni market. The announcement stemmed from a case involving a Kentucky investor who sued the state of Kentucky, claiming that Kentucky’s taxing of out-of-state muni bonds the investor held unconstitutionally discriminated against interstate commerce by taxing income from out-of-state bonds while exempting earnings on local bonds. The local judge on the case initially ruled against the investor, only to have the outcome reversed by the Kentucky Court of Appeals in a 3-0 vote. When the Kentucky Supreme Court refused to hear the case, the stage was set for a possible US Supreme Court review, which will come about in their next 9-month term beginning in October. Possible effects on the muni market if the court rules against Kentucky, is that it may force the 42 states who give their own bonds special tax treatment to either eliminate their local tax breaks or extend them to out-of-state bonds.

According to experts of the US Supreme Court, the Court has on a number of occasions has said states may not use their tax codes to provide commercial advantages to local companies. However the Court rules this time, look for this case to gain stature and importance over the next several months, as the muni market awaits the outcome.