State taxation of out of state bonds

Because the Supreme Court dislikes taking tax cases; they're not very good at them, and have been badly burned in the past - see, e.g., Pollock v. Farmers Loan and Trust Co., as well as the "respect" that case got in later cases, e.g., Brushaber.

What is the reasoning here? Why shouldn't a state be allowed to tax what it wants? Isn't it reasonable for a state to encourage the sale of it's bonds?

Without having read any of the briefs, I believe that the basic argument is that, by taxing the income derived from out-of-state bonds but not the income derived from in-state bonds, the state in question is interfering with interstate commerce because, by providing a more favorable treatment to interest earned on in-state bonds, it is in effect discouraging its residents from investing their money in out-of-state bonds, thereby interfering with the interstate movement of investment capital. For example, a state generally cannot impose a tax on widgets manufactured out-of-state that are brought into the state but exempt widgets that are manufactured in-state and kept in the state. There are, of course, other issues involved that make the case difficult, such as the sovereignity of the state, the issuance of the bonds in support of that sovereignity, and the degree to which the Constitution cut that sovereignity down.

There is a precedent for the Kentucky couple's position in the realm of diidends. The state of Arizona was not taxing dividends from in state corporations but was taxing dividends from out of state corporations. Helen Ladewig brought suit [which was later changed to a class action suit] against the state of Arizona. After many years of litigation, the class action plaintiffs prevailed and the state of Arizona had to repay dividend-receiving taxpayers a tax refund plus interest for the years 1986-1989. The interest paid exceeded the tax collected on the dividends because the case took so long to exhaust all appeals; in fact Ladewig had passed away and the case was litigated by her estate. The case was finally won on the basis of equal protection.

The power to tax is the power to destroy. Therefore, the fed govt is not permitted to tax state/muni bonds and the states are not allowed to tax the fed bonds. However, this is a question of one state's ability to tax another state's bonds. Like the moderator, I'd say the Supreme Court will agree to hear the case and Kentucky or any state, may not tax the bonds/muni's of another state, as the power to tax is the power to destroy. I think the reason this issue has not come up before, is that the amount in question in these state tax matters is usually to small for an individual to take to the Supreme Court.

I don't think the amounts are that small. For a particular taxpayer, yes, but overall it is a lot of money. At least here in NC the lawyers, one in particular, have been pretty successful in making it a class action. Some have become quite rich from the attorney's fees for the intangibles tax case and our various government pension cases.

-- Drew Edmundson, CPA Cary, NC

I believe that is only by statute, and the feds could tax state/muni bonds if the feds chose to.

That's constitutional, not statutory, and follows, IIRC, from the supremacy clause.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us