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Supreme Court Upholds States' Right to Exempt Their Own Bonds

Date: May 20, 2008

Source: News Room

The US Supreme Court ruled 7-to-2 that states can continue taxing interest on out-of-state municipal bonds while exempting interest on their own bonds without violating the Constitution. The decision is important for the waste industry particularly with regard to the public financing of waste processing facilities. In ruling on "Dept. of Revenue of Kentucky v. Davis," the high court overturned an appellate court ruling which found differential tax practices to discriminate against interstate commerce. Instead, the court said it promotes the financing of essential governmental services. However, it left the door open to possible future challenges revolving around private-activity or conduit bonds issued by governmental entities on behalf of private borrowers.

The case revolved around the dormant section of the commerce clause, which, according to most legal interpretations, suggests that only Congress can erect barriers to interstate trade and is meant to prevent economic protectionism - actions taken to promote instate trade and burden out-of-state competitors.

In defending their stance, the Justices relied heavily on their previous decision in the "United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste Management Authority." In that case, the court ruled that a local government could require private haulers to process their waste at a publicly owned facility, even if the haulers could process it at a lower cost at a private facility in another state. There the court ruled 6-3 that a government could show preference for itself if it served a public good.

In the end, the court was also reluctant to hand down a decision that would upend a large portion of the municipal market.

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