Business World

The Supreme Court on Monday upheld long-standing state tax exemptions for municipal bonds.

In a 7-2 ruling in a case from Kentucky, the justices permitted states to exempt interest on their own bonds from taxation while taxing residents for interest on bonds issued by other states.

In the $2.5 trillion municipal bond market, 42 states exempt some or all interest on their bonds from income taxes, while taxing interest on bonds from other states.

The states have said that throwing out the system of exemptions that began 90 years ago would have a devastating impact on state finances payday loans.

Industry groups warned of possible turmoil in the municipal bond market if the existing setup were dismantled.

In the majority opinion, Justice David Souter said that Kentucky’s version of the tax exemption — similar to that in most other states — does not violate the Constitution’s commerce clause.

In dissent, Justice Samuel Alito said the majority decision is protectionist and "invites other protectionist laws." 

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