Thought Leadership

Kentucky Files Case with U.S. Supreme Court to Rule on Tax Exemption of Out-of-State Municipal Bonds

November 30, 2006

The $2.3 trillion municipal bond market has developed amidst a set of long-accepted practices, beliefs and expectations.  One fundamental principle is that the interest on bonds issued by state and local governments is exempt from taxation by the federal government.  Interest on municipal bonds issued by an investor’s state has been – with some exceptions – exempt from that state’s taxation.  A corollary to this has been – again, with some exceptions – that interest on out-of-state municipal bonds is subject to taxation by the investor’s state of residence.

The premise that a state can tax the interest on an out–of-state bond has recently been challenged in Kentucky.