Sunday, August 05, 2007

Kentucky vs. Davis Municipal Bond Case: A Review of the Supreme Court Briefs

Gregory L. Germain of the College of Law at Syracuse University, provides his views on the opening briefs filed with the Supreme Court in the case of the Commonwealth of Kentucky v. Davis, Case No. 06-666. Germain notes:
"Kentucky's brief...misses the mark in a couple of respects. Kentucky’s first argument, to which substantial space is devoted, is that Kentucky’s municipal bonds are not similarly situated to its sister State’s municipal bonds because of the use to which the proceeds of the bonds are to be put. Kentucky points out that the proceeds of only Kentucky’s bonds must be used to benefit Kentucky’s citizens.

I believe this argument errs by focusing on the use of the proceeds generated from bond sales rather than focusing on the applicable interstate market activity. Although all bonds, indeed all debt, indeed even all securities, could be considered competitors in a general sense, the direct market competitors of Kentucky’s federally-tax-free municipal bonds are foreign-state federally-tax-free municipal bonds. Investors view federally-tax-free debt instruments differently from taxable debt instruments because of the lack of a tax exemption. If there were no in-state subsidy for municipal bonds, investors in the market would see all federally-tax-free municipal bonds as direct competitors, and would make their investment decisions between them on the basis of relative yield and default risk. Investors would not see taxable bonds as direct substitutes because effective yields would depend on the different personal federal tax situations of each investor.

The fallacy of Kentucky’s focus on the use of bond proceeds rather than on the market is evident when it is extended to private corporate bonds..."
Germain's review cites an article published in Tax Notes, Vol. 114, May 29, 2007. The article provides a review that incorporates the recent United Haulers decision and the impact on the dormant Commerce Clause.


Germain Critiques Opening Briefs in Davis
TaxProf Blog
By: Paul L. Caron
July 24, 2007

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