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Tax trouble for the Queen of the Blues

State muni bond tax system upheld

States and municipal bond managers are breathing easier today.

Supreme_court_2 The U.S. Supreme Court just ruled that it's OK for states to exempt the earnings from the bonds they issue, but collect taxes on bonds issued by other states. We blogged about this case back in October and November.

Forty-two states offer such exemptions for their municipal bonds. An estimated $2.5 trillion is invested in the municipal bond market. And nearly 500 mutual funds invest in bonds from specific states to take advantage of the tax  breaks.

The 7-2 high court decision (Justices Anthony Kennedy and Samuel Alito dissented) overturned a Kentucky court ruling that the state's tax breaks for its bonds violate the Commerce Clause of the U.S. Constitution.

Not so, wrote Justice David Souter for the court majority:

"For the better part of two centuries states and their political subdivisions have issued bonds for public purposes, and for nearly half that time some states have exempted interest on their own bonds from their state income taxes, which are imposed on bond interest from other states. The question here is whether Kentucky's version of this differential tax scheme offends the Commerce Clause. We hold that it does not."

All you legal eagles can read the Supreme Court's muni bond decision here.

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