Question

Taxpayers in the state of Kentucky alleged that a tax on out-of-state municipal bonds that excluded interest from in-state bonds was a violation of the commerce clause. Representatives of the state argued that the tax reflected a traditional government function that could persist without any differential treatment of local interests against the similar interests of out-of-state entities. Additionally, because Kentucky itself participates in the bond market, its potential discrimination should be found allowable. How would you have ruled in this case? Why? [Department of Revenue of Kentucky v. George W. Davis, 553 U.S. 328 (2008).]

Answer 1

If I were to pass a ruling on this case, it would have been the same as was passed by the trial court in favour of the Department of Revenue of Kentucky. This is because the dormant Commerce clause (about concerns regarding the economic protectionism by a state that benefits in-state entities and burdens out-of-the state similar entities) wouldn't be applicable in the present scenario. The state's present tax regime has not caused an economic benefit to private entities whatsoever it instead has acted as an impetus for the residents of the state to invest in their home state-issued bonds. Also, many small municipalities in the state were able to find subscribers in the intrastate market because of this regime which otherwise wouldn't have been possible if they were to issue in the interstate markets considering their low creditworthiness. The intrastate fund has thus encouraged these municipalities to undertake their developmental projects which would benefit the citizens in the long run by providing them with a source to raise funds. The market participant exception's applicability is also justifiable in the present case.