A case questioning the legality of a Kentucky law that exempts the interest on most municipal bonds from being taxed by the state -- when the investor is a resident of the state -- could have far-ranging effects for the $2.3 trillion municipal-bond market.
This week, Kentucky's Supreme Court declined to review an appeals-court decision that found it to be unconstitutional for the state to tax only out-of-state bonds. A Chicago couple -- George and Catherine Davis -- brought the case, and similar cases are reportedly on the docket in Arizona and North Carolina. Most other states with a state income tax have rules similar to Kentucky's, arguing that the tax break incentivizes investors to keep their money local.
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