Three weeks ago, in No. 05-1345, United Haulers Association v. Oneida-Herkimer Solid Waste Management Authority, the Court upheld "“ over a Commerce Clause challenge "“ a municipal ordinance that requires trash haulers to deliver their trash to a publicly operated processing site. In so doing, the majority reasoned that "it does not make sense" to subject laws favoring local government to the same level of scrutiny as laws that "favor[] in-state business over out-of-state competition," as the latter often seek to achieve "simple economic protectionism." But what about state laws that favor the state over other states? The Court will take up that question next Term in No. 06-666, Kentucky Department of Revenue v. Davis, in which it granted cert. today.

At issue in Davis is a provision in Kentucky's income tax law that taxes interest income from bonds issued by other state and local governments while providing an exemption for interest from Kentucky bonds. Two Kentucky taxpayers challenged the law, arguing that the tax discriminated against holders of out-of-state bonds and thus violated the Commerce Clause. Kentucky's intermediate appellate court agreed. It held that the state's scheme for taxing bond interest was unconstitutional, "as it obviously affords more favorable taxation treatment to in-state bonds than it does to extraterritorially issued bonds." The market participant doctrine did not save the law, the court explained, because the state's "issuance of bonds is not the issue. Rather, the sole issue is Kentucky's decision to tax only extraterritorial bonds" "“ which is "clearly[] "a primeval governmental activity.'"

After the Kentucky Supreme Court denied review, the state sought certiorari. Although the petition begins by alleging a split with a decision of Ohio's intermediate appellate court (which, according to the petition, "upheld against Commerce Clause challenge a state income tax law indistinguishable from Kentucky's law"), the petition focuses primarily on what it describes as the dire consequences of allowing the lower court's ruling to stand: in addition to Kentucky and Ohio, forty other states have similar laws. Moreover, state and local governments "rely heavily upon the issuance of debt to finance public projects," with the interest exemption in turn playing an important role in the states' ability to issue such bonds. In any event, the state asserts, its tax law is not a matter of the "economic protectionism" prohibited by the Court's Commerce Clause jurisprudence, but instead "one where a sovereign is acting on its own behalf in the service of its citizens in a manner that favors itself over other sovereign states."

Opposing certiorari, respondents emphasize that the lower court's decision invalidating the state tax scheme is fully consistent with the Supreme Court's Commerce Clause jurisprudence because the Kentucky law is facially discriminatory and is motivated solely by economic protectionism. And although "it may be true that Kentucky acts as a market participant in the sale of its bonds," respondents reiterate, "it clearly does not do so in taxing the income from the bonds of other states while exempting the income its residents derive from intrastate bonds." Finally, respondents caution, "[t]o adopt the Petitioners' argument that the Commerce Clause does not apply to a state's taxation "on behalf of itself where the end result is to provide the taxing state with a competitive advantage over another sovereign' would render the dormant Commerce Clause utterly meaningless and undo over a century of Commerce Clause precedent." (This is obviously not an argument aimed at Justices Scalia and Thomas, who made clear in United Haulers that they wouldn't mind doing precisely that.)

Interestingly, court observers had speculated that Davis "“ which was first considered by the justices at their February 16 conference, but then was held for nearly three months "“ might have been slated for a GVR in light of United Haulers. Instead, after being re-distributed for conferences on May 10 and May 17, the case showed up as a grant on today's order list "“ perhaps indicating that at least four justices may be ready to write another chapter in the Court's Commerce Clause jurisprudence.

Posted in Dept. of Revenue of Kentucky v. Davis, Everything Else