Exemption of Bonds in States

Reciprocal State Tax Exemption:

See Kentucky v. Davis for a discussion of whether it was unconstitutional for the Commonwealth of Kentucky to exempt its own bonds but not automatically exempt bonds issued by other states. The Supreme Court determined that each state may make its own determination of whether or not to exempt other states’ bonds. The Justice writing the court’s opinion had the following to say in his introduction: “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, which are imposed on bond interest from other States. The question here is whether Kentucky’s version of this differential tax scheme offends the Commerce Clause. We hold that it does not.”  What this means is that there is no automatic exemption of one state’s bonds in another state. Exemption of one state’s bonds in another state would depend on that other state’s statutes.


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