Ruling could raise cost of muni bonds

The U.S. Supreme Court will take up a case that could affect state taxes on municipal bonds, published reports said. On Nov. 5, the court will hear a lawsuit from Kentucky investors George and Catherine Davis, who argue that the state’s policy on taxing out-of-state municipal bonds while exempting income from Kentucky bonds is unfair, the Los Angeles Times reported. Specifically, they said that the state’s policy of taxing out-of-state bonds and not its own violates the Commerce Clause and the Equal Protection Clause of the U.S. Constitution, according to Fortune. Last year, a Kentucky appeals court ruled in favor of the Davises, who originally filed suit in 2003. The case has become a high-profile item for muni-bond investors and analysts because if the Supreme Court were to agree with the Davises, each state would face a choice: tax interest on all muni bonds or exempt all from taxation, the L.A. Times said. But even if Kentucky lost the suit, other states would likely petition Congress and pursue legislation that would preserve their right to make their bonds tax free, said Gregory Germain, a law professor at Syracuse University, to the L.A. Times.