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Kentucky V. Davis Case Study

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Elizabeth Goldenberg
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Discuss the content and outcome of this case
Department of Revenue of Kentucky v. Davis

In the case of Department of Revenue of Kentucky v. Davis, the United States Supreme Court addressed the legality of Kentucky’s income tax exemption for interest on municipal bonds issued within the state. Kentucky tax law requires that only earned interest income on bonds issued out of state be taxed as part of an individual’s adjusted income. All earned interest from in state bonds is exempt from inclusion in an individual’s adjusted income. Kentucky residents, George and Catherine Davis, filed a class action complaint on the basis that Kentucky’s tax law is in violation of the dormant Commerce Clause of the United …show more content…
The dormant Commerce Clause prohibits States from passing legislation that discriminates against interstate commerce. The Davises argue that Kentucky tax law discriminates against the purchase of out of state bonds. By making earned interest from in state bonds tax free, Kentucky law is favoring only in state commerce. The Department of Revenue of Kentucky argues that they are not discriminating since in state and out of state bonds are not “substantially similar.” The Department of Revenue also argues in favor of their tax exempt in state bonds because they are participants in the bond market. A prior case found that the dormant Commerce Clause does not prohibit a state as a market participant to treat in state activity favorably. The Department of Revenue believes that Kentucky law rightfully encourages investment in their infrastructure and provides for necessary tax income. The Circuit Court ruled that Kentucky’s tax exemption for in state bonds is not in violation of the Commerce Clause since Kentucky is the seller. The Circuit Court also found that the tax structure is constitutional since it promotes the financing of public works. The Court of Appeals rejected The Circuit Court’s reasoning and held that Kentucky’s tax structure is unconstitutional for favoring in state over out of state bonds. The Supreme Court reversed The Court of Appeals holding, finding that Kentucky’s tax structure

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