Press Releases

Release Date: July 20, 2007
Contact:
Katrina Keller, 646-637-9821, kkeller@sifma.org

SIFMA Files Amicus Brief in Davis v Kentucky

Interest on In-State Municipal Bonds Should Remain Tax Free for State Residents

New York, NY, July 20, 2007 — The Securities Industry and Financial Markets Association (SIFMA) today filed an amicus, or friend of the court, brief arguing that the Supreme Court should reverse a prior ruling of the Kentucky Court of Appeals and allow the interest earned by state residents on municipal bonds issued within the state to remain tax-free, but to tax interest earned by its residents on municipal bonds issued by other states.

SIFMA notes in its brief that the statute benefits Kentucky governmental entities by giving its residents an incentive to purchase Kentucky state and local government bonds at lower interest rates than they would require for purchase of the bonds of other states due to the tax advantages, and that this relationship between states does not violate the Commerce Clause of the United States Constitution. 

“The Kentucky tax statue clearly serves a legitimate — indeed compelling — local concern: providing incentives to Kentucky’s citizens to invest in the bonds that secure financing for local municipalities at lower interest rates.  This financing, in turn, provides the citizens with the necessary infrastructure to ensure the community’s health and welfare,” SIFMA says in its brief. 

SIFMA cautions that affirming the decision of the Kentucky Court of Appeals may result in instability and price uncertainty in the municipal bond markets, highlighting that forty-two states have laws that, like the Kentucky statute, give preferential treatment to in-state bonds over bonds issued by other states and their municipalities.  Changing the status quo may create an unsettled market where investors face price uncertainty on outstanding municipal bonds, and issues revolving around recovering previously foregone tax revenues may compound market disruption, especially for investors who buy fixed-income, tax-advantaged bonds precisely for their predictable income streams.

“Finally, the market as a whole likely will suffer through an initial period of ‘price discovery,’ during which issuers and other market participants may be unsure of demand for municipal bonds and may be forced to value bonds through trial and error.  This market turmoil may force market makers to buy back municipal bonds, which may cause inventory to swell to unusually high levels, further depressing prices, until the full effect of the decision is absorbed,” SIFMA’s brief says.

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The Securities Industry and Financial Markets Association brings together the shared interests of more than 650 securities firms, banks and asset managers. SIFMA's mission is to promote policies and practices that work to expand and perfect markets, foster the development of new products and services and create efficiencies for member firms, while preserving and enhancing the public's trust and confidence in the markets and the industry. SIFMA works to represent its members’ interests locally and globally. It has offices in New York, Washington D.C., and London and its associated firm, the Asia Securities Industry and Financial Markets Association, is based in Hong Kong.