Encyclopedia of Municipal Bonds: A Reference Guide to Market Events, Structures, Dynamics, and Investment Knowledge

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Kentucky Department of Finance v. Davis

Most states tax the tax-exempt interest earned on the bonds sold by other states. In April 2003, a couple in Louisville, Kentucky, George and Catherine Davis, decided to challenge this policy, saying it violated the Commerce Clause of the U.S. Constitution, which prohibits states from discriminating against interstate trade.

Of the 50 states, 41 tax the interest earned on the bonds of other states; four—Illinois, Iowa, Oklahoma, and Wisconsin—tax some of their own. In practice, what this means is that investors who live in a state with high taxes, such as California, Hawaii, New York, New Jersey, North Carolina, Ohio, Oregon, and Vermont (called by bond dealers “specialty states”), among others, invest ...