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.