The Supreme Court was scheduled to hear arguments Monday in a case seeking to eliminate a state’s right to issue tax-free municipal bonds for paper concerning its own state, but to tax out-of-state municipal bonds, The Wall Street Journal reports.
A Kentucky court ruled out the practice last year. If the Supreme Court upholds that decision, it could upset the $155 billion state municipal bond market and lead to the demise of single-state bonds.
Analyzing the case, The Journal reports, it appears that the Supreme Court will overturn the Kentucky decision. Given the fact that bonds issued by New York, which would be subject to high taxes if the Kentucky decision is upheld, are commanding a premium, “the market is telling you that the Supreme Court is going to overrule the ruling in Kentucky,” said Dan Loughran, a manager of several municipal bond funds at OppenheimerFunds.
Should the justices decide that capital financing is a critical part of a state’s sovereign authority and that Kentucky is merely trying to give its own funds an advantage, they will uphold the status quo.
“These are the kind of trade barriers and trade retaliation that we don’t want state to be entangled in,” said Eric Brunstad, a partner with Bingham McCutcheon who argued against the Kentucky decision.