Kentucky Court Decision Could Undercut Single State Funds

A recent Kentucky Court of Appeals decision could have profound implications for single state tax-exempt mutual funds, as well as the special appeal of in-state municipal bonds and in-state "section 529" state-sponsored college savings funds to residents of the issuer’s state.

Single state tax-exempt mutual funds appeal to residents of states that tax interest on bonds of other states but exempt their own bonds from tax. These states confer a double-tax exemption on their residents, but only for bonds issued by the home state and certain political subdivisions and authorities. The Kentucky court decision, Davis et al v. Department of Revenue of the Finance and Administration Cabinet, Commonwealth of Kentucky, ruled that these tax statutes violate the commerce clause of the United States constitution. The decision, handed down in January 2006, has been appealed to the Kentucky Supreme Court.