WASHINGTON — A majority of the Supreme Court on Monday appeared set to uphold the right of states to tax interest on out-of-state municipal bonds while exempting their own bonds from taxation.
Such a ruling would avoid what some analysts warned would be major disruption in the $2.5 trillion muni-bond market if the court chose to overturn the practice.
Forty-two states exempt some or all of their municipal bonds from income taxes, while taxing interest on bonds from other states. At issue is whether the practice is an unconstitutional interference with interstate commerce.
Eric Brunstad, a lawyer representing a couple in Kentucky who sued the state for taxing out-of-state bonds, argued that Kentucky’s tax policies amounted to a “discriminatory barrier” to the sale of bonds from other states.
“The victims under your approach,” Justice John Paul Stevens responded, “are the 49 other states, and all of them seem to support your opponent,” a reference to a court brief filed by the 49 states in support of Kentucky.
