In a 7-2 vote, the U.S. Supreme Court ruled to uphold the tax exemptions that states and localities afford to their in-state municipal bonds.

The ruling by the High Court overturned an appellate court decision in Kentucky that stated that the practice discriminated against out-of-state bonds and therefore was in violation of the Constitution.

Writing for the majority, Justice David Souter agreed that the states can give a tax break to purchasers of in-state bonds without violating the U.S. Constitution and that therefore it was not a case of unfair protectionism.

The case stems from a 2003 lawsuit, “Department of Revenue of Kentucky v. Davis,” in which a Kentucky couple sued the state government after it mandated that they pay state taxes on municipal bonds they held from other states.

Municipal bonds, which are often used to finance such projects as highways and schools, are estimated to be roughly a $2.5 trillion market.


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