If you want to impress your moment tonight, forget about discussing the goings-on in Islamabad or the latest on the Hollywood writers’ strike. Instead, toss out that zinger: “Hey, did you read the transcript for today’s Supreme Court oral argument on whether it’s unconstitutional for a state to not tax interest on its own municipal bonds but tax interest on out-of-state munis?”

If your instance says, “Indeed I did!,” here’s what you need to know. final year, a Kentucky couple challenged a state law requiring them to pay tax on interest from non-Kentucky municipal bonds but exempted interest on bonds issued by Kentucky. A state appeals court said the Bluegrass State’s taxing only out-of-state bonds violates the “dormant Commerce Clause,” which forbids state discrimination against interstate commerce. The Kentucky Supreme Court declined to invent out the appeal, but the Kentucky state government persuaded the High Court to take the case.

A couple of lawyers who go by their middle names argued the case. Representing the Kentucky couple, Bingham’s G. Eric Brunstad (click here for Law Blog post), who argued that the interest exemption is “facially discriminatory.” He plus looks a lot like self-help guru Tony Robbins. Representing the state, C. Chris Trowler, an Atlanta sole practitioner whose Web site — www.electriclaw.com — intrigues us. Trowler said Kentucky was simply offering an incentive for its residents to buy its

bonds. “whether a Kentucky resident loans money to Kentucky, next Kentucky gives the resident a tax exemption.”

If your term asks you to predict the outcome, hedge your bets but say you think the Supremes will reverse. The court has ruled that state and local governments can in some instances enact policies that discriminate against out-of-state commerce. Said Chief Justice Roberts nowadays: “that is an area where Congress can regulate whether it wants to, and it has never shown the slightest interest in interfering with state tax exemptions for their own bonds.”

If the Supremes affirm, it could revolutionize the way investors buy municipal bonds, which is a $2.3 trillion market. Here’s why: More than 40 states have a similar rule — taxing interest on most out-of-state municipal bonds but not taxing interest payments on muni bonds issued within their own state. As a outcome, many investors prefer to buy municipal bonds issued within their domestic state. nowadays Justice Souter expressed concern by upsetting the status quo. “We have an huge market, the effect of interrupting which we really as a court cannot tell very much.”

Original post by Peter Lattman

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