Kentucky Department of Revenue v. Davis--upheld KY's practic

I guessed the outcome of this case incorrectly, though two Justices (Alito and Kennedy) agreed that the KY scheme, shared by 41 other states, to tax at differential rates the income generated from the sale of municipal bonds to state and out-of-state residents, violated the "dormant" or "negative" Commerce Clause. The majority of the Court agreed that it did not violate the Constitution Here is a brief summary of the confusing "Dormant Commerce Clause" doctrine:

"The "Dormant" Commerce Clause, also known as the "Negative" Commerce Clause, is a legal doctrine that courts in the United States have implied from the Commerce Clause of the United States Constitution. The Commerce Clause expressly grants Congress the power to enact legislation that affects interstate commerce. The idea behind the Dormant Commerce Clause is that this grant of power implies a negative converse — a restriction prohibiting a state from passing legislation that improperly burdens or discriminates against interstate commerce. The question of whether such a negative implication should be recognized, and how far it should extend, has been a subject of extensive disagreement among Federal judges."

The majority (opinion by Souter) which upheld KY's law, was so fractured, however, that no fewer than five Justices in the majority filed separate opinions in the case. Two of the majority Justices (Scalia and Thomas) are not fans of the "dormant commerce clause" jurisprudence which lay beyind Justice Souter's analysis. Scalia would limit it to the Court's precedents; Thomas would do away with it altogether. The two dissenters argued that the Court purchased economic stability at the cost of jurisprudential diasater. That is, they argued that if Court invalidated the KY law, it would send the bond markets into a swivet. But, by not invalidating the KY law, they felt that the Court's jurisprudence and, in fact, some of the cornerstones of the free enterprise system (which would disallow protectionist measures) would be brought into question. So difficult was this issue for the Court to "get its hands around" (though the statement of the case is trivially simple), that the only Justices who didn't file their own opinions were Ginsburg and Breyer.

Justice Souter's Major Points

The two paragraphs that capture the essence of his opinion are:

"Modern dormant Commerce Clause law is driven by concern about “economic protectionism-that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors,” New Energy Co. of Ind. v. Limbach, 486 U.S. 269, 273-274, 108 S.Ct. 1803, 100 L.Ed.2d 302-but that concern is limited by federalism favoring a degree of local autonomy. Under the resulting analysis, a discriminatory law is “virtually per se invalid.” Oregon Waste Systems, Inc. v. Department of Environmental Quality of Ore., 511 U.S. 93, 99, 114 S.Ct. 1345, 128 L.Ed.2d 13. An exception covers States that go beyond regulation and themselves “participat[e] in the market” to “exercis[e] the right to favor [their] own citizens over others,” Hughes v. Alexandria Scrap Corp., 426 U.S. 794, 810, 96 S.Ct. 2488, 49 L.Ed.2d 220, reflecting a “basic distinction ... between States as market participants and States as market regulators,” Reeves, Inc. v. Stake, 447 U.S. 429, 436, 100 S.Ct. 2271, 65 L.Ed.2d 244. Last Term, in a case decided independently of the market participant exception, this Court upheld an ordinance requiring trash haulers to deliver solid waste to a public authority's processing plant, finding that it addressed what was “ ‘both typically and traditionally a local government function,’ ” and did “not discriminate against interstate commerce for purposes of the dormant Commerce Clause,” United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste Management Authority, 550 U.S. ----, ----, 127 S.Ct. 1786, 167 L.Ed.2d 655."

The United Haulers case from 2007, then, would be the significant precedent upon which the Court relied. As Justice Souter went on to say (in the summary of his argument in the Syllabus):

"United Haulers provides a firm basis for reversal here. The logic that a government function is not susceptible to standard dormant Commerce Clause scrutiny because it is likely motivated by legitimate objectives distinct from simple economic protectionism applies with even greater force to laws favoring a State's municipal bonds, since issuing debt securities to pay for public projects is a quintessentially public function, with a venerable history. Bond proceeds are a way to shoulder the cardinal civic responsibilities listed in United Haulers: protecting citizens' health, safety, and welfare. And United Haulers' apprehension about “unprecedented ... interference” with a traditional government function is warranted here, where respondents would have this Court invalidate a century-old taxing practice presently employed by 41 States and supported by all. In fact, emphasizing an enterprise's public character is just one step in addressing the fundamental element of dormant Commerce Clause jurisprudence that “any notion of discrimination assumes a comparison of substantially similar entities,” id., at ----, 127 S.Ct., at 1789. Viewed through the lens of Bonaparte v. Tax Court, 104 U.S. 592, 26 L.Ed. 845, there is no forbidden discrimination because Kentucky, as a public entity, does not have to treat itself as being “substantially similar” to other bond issuers in the market."

As the dissenters pointed out with glee, this kind of argument is nothing more than affirming the traditional "police power" of the state--a sort of "circular-reasoning" power that exists by assertion rather than by any particular grant of power [I mean by "circular reasoning" an assertion that says that something is so because it doesn't violate the Commerce Clause, and it doesn't violate the Commerce Clause because it is within the police power of the state].

But it seems to me this is the basis of the Court's decision--states can tax municipal bonds at a differential rate for state residents and out-of-state residents because as long as there is an extra-economic interest in the taxation, it doesn't run afoul of the dormant commerce clause. It is within the traditional powers of the state to do so. And, since this practice has been in place for a very long time, there seems to be no real reason for upsetting the practice.

Justice Souter's final argument, that the State of KY (as well as 41 other states) served as a "market participant" rather than "market regulator" in the sale of bonds, which would give them greater leeway in a Commerce Clause challenge, didn't garner majority support on the Court.

Thus, the differential tax rates on municipal bonds for instate (no tax) and out-of-state residents was upheld by the Court. The rationale of the opinion wasn't crystal clear; it seems that this isn't the right time to take on the philosophy of the issue.

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