On July 19, 2007, the State of Kentucky filed its brief in Davis v. Kentucky Department of Revenue of the Finance and Administration Cabinet, urging the U.S. Supreme Court to reverse a Kentucky appellate court's early 2006 ruling, based on the "dormant" Commerce Clause of the U.S. Constitution, holding unconstitutional a statute exempting municipal bond interest from Kentucky's income tax only if the municipal bonds are issued in Kentucky. Kentucky's brief argues that state sovereignty differentiates each state from every other state and from private participants in commercial transactions for purposes of the Commerce Clause, and permits each state to use its tax statutes to lower the borrowing costs on bonds issued by such state and its political subdivisions, without requiring that a state provide similar tax advantages for municipal bonds issued by or in other states.
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