Davis v. Department of Revenue of Kentucky: A Preliminary Impact Assessment
AbstractStates with income taxes frequently exempt municipal bond interest from state taxation. Such exemptions, referred to as double exempts, are tax expenditures that reduce state revenues, but are viewed as a subsidy to the cost of capital for the state and its localities. All but a few states provide the income tax exemption for state based issues while taxing interest from municipal bonds issued by muni issuers in other states. A recent court case, Davis vs. Department of Revenue of Kentucky, declared state statutes limiting the state income tax exemptions to ”in-state” issues unconstitutional. This paper provides some legal background and context for the current case and addresses two key fiscal implications of this case. First, the paper presents a basic model that suggests that bonds issued by states with higher marginal tax rates would see the yields increase on their obligations while states with lower than average marginal tax rates would see their yields decline. The yields would converge at new market equilibrium due to the elimination of tax preferences across the states. Second, the preliminary estimates suggest a good deal of variance in how much tax revenue each state will lose if the case is upheld by the Supreme Court.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by University of Kentucky, Institute for Federalism and Intergovernmental Relations in its series Working Papers with number 2007-03.
Length: 22 pages
Date of creation: Apr 2007
Date of revision:
This paper has been announced in the following NEP Reports:
You can help add them by filling out this form.
reading list or among the top items on IDEAS.Access and download statisticsgeneral information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (David E. Wildasin).
If references are entirely missing, you can add them using this form.