On November 5, the U.S. Supreme Court is scheduled to hear oral arguments in Davis v. Kentucky Department of Revenue—a lawsuit that threatens the continued existence of hundreds of single-state municipal bond funds, each of which holds a particular state’s bonds and caters to that state’s residents. The Supreme Court is hearing an appeal from a January 2006 Kentucky court ruling that sent shock waves through the $2 trillion municipal bond market. The Kentucky court decided that states could no longer tax interest income from out-of-state municipal bonds while exempting interest income from home-state bonds, ruling that this long-standing practice was an unconstitutional interference with interstate commerce.

Critics of the Kentucky court's ruling fear massive upheavals in the municipal bond market, while supporters see the promise of a more efficient market that can better serve investors and bond issuers. Panelists at this conference will examine the many questions raised by this case. Walter Hellerstein, the Francis Shackelford Distinguished Professor of Taxation Law at the University of Georgia Law School, will explain the legal issues involved. AEI economist Alan D. Viard will discuss the economic effects of the challenged state tax policies. Gerard J. Lian, the executive director of the Morgan Stanley/Van Kampen tax-exempt mutual fund group, will discuss the case’s market implications. AEI research fellow Alex Brill will moderate.