Monday, May 19, 2008
Magic Muni Munificence
One thing to note is that the SC didn't address taxation of non-government bonds, which are sometimes issued under state imprimatur by a private venture the state wants to lure (a manufacturer, a sports team). The reasoning used to excuse government bonds from the Commerce clause here might not hold for such bonds:
The logic that a government function is not susceptible to standard dormant Commerce Clause scrutiny because it is likely motivated by legitimate objectives distinct from simple economic protectionism applies with even greater force to laws favoring a State’s municipal bonds, since issuing debt securities to pay for public projects is a quintessentially public function, with a venerable history.The actual ruling (55 pages) as published on the SC website. Kennedy dissented, joined by Alito, and Kennedy's dissent is scathing, but the overall majority was 7-2.
This is a very important ruling. Consider, for example, California. It has a high state income tax, and therefore a big advantage in marketing muni bonds to local residents. California is not the most creditworthy state by a long shot, and some of its municipalities are in deep fiscal trouble. Therefore if government issues had to compete with bonds across the nation, many issues would probably have to increase the rates paid in order to compete with bonds of other states. A state with a lower tax rate has less comparative advantage internally.
But you and Tom are correct in commenting that overall economic inefficiencies hurt the economy.
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