USSC: States Can Exempt Their Own Muni Bond Interest without Exempting Interest from Other States

Government officals from "next door" Kentucky are breathing easier after the U. S. Supreme Court voted 7-2 to overturn an appelate court ruling and allow the Bluegrass State to tax earnings on municipal bonds of other states while exempting earnings from bonds of the commonwealth of Kentucky and its municipalities. Judge David Souter said that the practice was permissable and did not constitute unfair protectionism.

Have to say that the Supremes reached a common-sense solution here. The result may be a little disappointing to tax practitioners; it means that state taxable interest and federal taxable interest usually will differ if the taxpayer either owns municipal bonds or a mutual fund with these bonds.