Justices uphold municipal bond tax breaks

May 19, 2008 at 10:08 PM

WASHINGTON, May 19 (UPI) -- The U.S. Supreme Court ruled Monday that states may give special tax breaks on interest from municipal bonds sold within their borders.

In its 7-2 decision, the high court reversed a Kentucky court decision that the state's tax breaks on in-state securities the U.S. Constitution, Legal Newsline reported.

The decision allows states to exempt interest earned on in-state bonds from taxes, while taxing the income from bonds issued by other states. The justices, however, declined to uphold the tax exemption for private-activity bonds.

Kentucky residents George and Catherine Davis brought the case, arguing that the tax breaks violate the Commerce Clause, which gives the federal government the sole power to regulate interstate commerce.

"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," Justice David Souter wrote for the majority.

Chief Justice John Roberts and Associate Justices Stephen Breyer, Ruth Bader Ginsburg, Antonin Scalia, John Paul Stevens and Clarence Thomas joined Souter in the majority.

Dissenting was Justices Samuel Alito and Anthony Kennedy, who called the special tax breaks "protectionist."

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