Soon after the Supreme Court released its decision May 19th in Kentucky Department of Revenue v. Davis, some legal pundits and bloggers immediately began decrying it as an example of judicial protectionism of the municipal bond industry.
Considering the emphasis Justice David Souter, writing for the majority, and Justice Antonin Scalia, in a concurring opinion, placed on the number of states with tax exemption legislation similar to Kentucky's, the number of years the bond market has operated in this fashion, and the size of the industry in dollars exceeding several hundred billion plenty of fodder readily exists for those unhappy with the decision to denounce its result. But notwithstanding the seemingly public policy basis for the court's opinion, the decision actually rests upon sound constitutional theory, established principles of federalism, and court precedent regarding the scope of the dormant commerce clause.
Foremost, the court's opinion arguably is a case resting on principles of federalism. Kentucky's issuance and regulation of municipal bonds are an important method for the commonwealth to raise capital for desperately needed public works, such as the construction of schools, bridges, sewage treatment facilities, and highways. Exemption from state taxation for interest earned on in-state municipal bonds provides an incentive for the citizens of Kentucky, or any state as the issuing state, to invest in the public works that benefits all its citizens.
This system, therefore, has the effect of lowering the state's borrowing costs, thereby permitting the accumulation of more capital for more projects. Every state has a legitimate sovereign interest in fostering its public projects. If the court had ruled otherwise and struck down Kentucky's tax-exemption regulations as unconstitutional, the result would have been an unprecedented judicial interference with the commonwealth's sovereignty and its relations with its citizens.
Moreover, through the court's previous decisions, it consistently has tailored its dormant commerce clause analysis to prohibit state regulations that impede or discriminate against free, private markets operating in interstate commerce. The historical notion underlying the dormant commerce clause doctrine was the fear that the states might be tempted to utilize their more expansive treasuries vis-Ã -vis private companies or individuals in order to provide their own citizens with an unfair competitive advantage over out-of-state private competitors.
The court's jurisprudence, therefore, has consistently focused on the removal of any state-imposed barriers to "free private trade" among the citizens of all states. The court's decision in Davis thus was a coherent application of the earlier precedent that has shaped and formed the court's dormant commerce clause jurisprudence. As Justice Souter wrote in Davis: "The Kentucky tax scheme falls outside the forbidden paradigm because the commonwealth's direct participation favors, not local private entrepreneurs, but the commonwealth and local governments."
As a result, contrary to any cries of result-oriented jurisprudence or economic protectionism, the court's decision in Kentucky v. Davis serves as an example of how the nation's judicial branch should conduct itself. The decision is well reasoned, relied on prior precedent, and reflected a respect for the division of power between the federal government and the states. It further reflects a consistent application of the court's dormant commerce clause jurisprudence and constitutional theory. History may well prove this case to be one of the court's landmark decisions from the early 21st century.
Anthony Sammons is an attorney with Woodward Hobson & Fulton LLP in Lexington, Ky., and filed a friend of the court brief on behalf of Dupree Mutual Funds in support of the Kentucky Department of Revenue.