States Can Give Preferential Treatment to Their Own Muni Bonds

The Supreme Court ruled today in Dept. of Revenue v. Davis that states can give preferential treatment to their own municipal bonds (over those of other states). Thus, the practice of paying state income tax on out-of-state municipal bonds will continue. The Supreme Court ruling was fractured, with Justice Souter’s opinion, four concurring opinions, and two dissenting opinions.

The main impact of this decision is that municipal bonds will tend to be purchased by individuals who reside in that state, so that they can obtain the largest tax impact. The decision is good news for California, as a decision that would have invalidated preferential treatment would have likely cost the state millions of dollars in additional interest.

Link to previous coverage of this case on Taxable Talk

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