A tax case filed in 2003 by a retiredKentucky couple has big implications for themunicipal bond market. The couple challengedKentucky's policy of taxing out-ofstatemunicipal bonds but not in-statemunicipal bonds as a violation of theCommerce Clause of the US Constitutionthat prevents states from discriminatingagainst interstate trade. The Kentucky Courtof Appeals sided with the couple, and thestate of Kentucky has since appealed thecase to the US Supreme Court.
If the Supreme Court upholds the verdict,1% to 4% of the value of municipalbonds would be trimmed from California,Missouri, New York, Rhode Island, andother states with big in-state tax advantages.However, states such as Illinois,Texas, and Washington would be beneficiaries,as they have been required to offerhigher yields across the country due to noin-state tax breaks. If upheld, the case willimpact college savings plans in states suchas New York by eliminating tax deductionsfor residents who use in-state college savingsplans and not outside-state plans.