Section of Taxation Publications

VOL. 61
NO. 4

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Note: The following is an excerpt from the introduction to the article as published in The Tax Lawyer. Author citations have been omitted for brevity. Tax Section members may read the article in its entirety in Adobe Acrobat format.

Cash, Trash, and Tradition: A New Dormant Commerce Clause Exception Emerges from United Haulers and Davis

Daniel R. Ray*

I. Introduction

Like most of her sister states, Kentucky law exempts from state income taxation the interest earned on municipal bonds issued by the State and its political subdivisions. Interest earned on out-of-state municipal bonds is taxable. In Davis v. Department of Revenue of the Finance and Administration Cabinet of Kentucky (Davis), the Kentucky Court of Appeals found this disparate treatment to be a violation of the dormant Commerce Clause. The Supreme Court agreed to review Davis during the October 2007 term to harmonize conflicting state court decisions and to resolve this issue of national importance. In Davis, the Supreme Court reversed the Kentucky Court of Appeals, concluding that there was no constitutional infirmity in Kentucky’s municipal bond tax law. Justice Souter’s opinion found controlling the rule announced in United Haulers Association, Inc. v. Oneida-Herkimer Solid Waste Management Authority. There, the Supreme Court ruled that “flow control” ordinances favoring a government-owned waste disposal facility did not discriminate against interstate commerce. Waste disposal, said the United Haulers Court, is a traditional government activity. All private waste disposal companies that were in competition with the government’s waste disposal facility were treated exactly the same, regardless of whether they were in-state or out-of-state. A plurality then concluded that the counties were pursuing legitimate government interests and that the local benefits of the flow control ordinances outweighed any burdens they might place on interstate commerce.

Justice Souter, writing for the Court in Davis, said “[i]t follows a fortiori from United Haulers that Kentucky must prevail.” United Haulers was controlling, he said, because issuing debt securities is “a quintessentially public function,” a function with a “venerable history.” While it is easy to say with the benefit of hindsight, the Davis outcome was never much in doubt. A majority of the Roberts Court appears to accept, as a baseline premise, that the focus of the dormant Commerce Clause is on state regulations and taxes that impair private trade. If the Constitution is not offended by a regulatory scheme that monopolizes one government function—waste disposal—in favor of a public agency, it is difficult to see how a constitutional line is crossed when a state uses its taxing authority merely to favor another government function—issuing its public debt securities. Upholding Kentucky’s municipal bond tax system would be expected of a Supreme Court that favors a relatively greater degree of state autonomy over free markets when state and local governments are doing the things they are organized to do.

Though the outcome may have lacked suspense, there is much about Davis, particularly when read together with United Haulers, that is both significant and worthy of close analysis. In particular, Davis expressly goes where no dormant Commerce Clause decision has gone before. States are now free to couple a discriminatory tax scheme with a traditional government function, at least in those instances where in-state and out-of-state interests are treated the same. The danger here is clear. Taxes can support any number of government functions; there will be an obvious temptation to read Davis as a license to enact discriminatory taxes with dormant Commerce Clause impunity. In addition, taxation is simply one form of regulation. If discriminatory taxes in support of traditional government functions are allowed under the dormant Commerce Clause, we should expect to see states try a variety of regulatory measures in conjunction with these functions. Courts will have their hands full setting the outer limits on this newfound authority. Government and tax counsel advising public clients will need to be familiar with United Haulers and Davis, the opportunities they present, and the pitfalls that are likely to go along with those opportunities.

This article is divided into four parts. Because United Haulers sets the analytical framework for Davis, Part II reviews the United Haulers decision in some detail. Part II also describes the multi-part rule that emerges from United Haulers. Part III lays out the facts and procedural history in Davis, and then summarizes Justice Souter’s opinion for the Court. In addition, this Part takes the United Haulers rule and adds to it the elements that controlled the Davis outcome. Part IV analyzes the Davis decision and the United Haulers rule as elaborated by Davis and concludes that the United Haulers rule is ill-advised. The Court would do better to build on the now-familiar market participant rule, a rule that, if correctly applied, achieves the same result as the United Haulers rule, but without all the jurisprudential baggage that accompanies traditional government functions. Finally, Part V explores the opportunities and difficulties that the United Haulers rule presents to government and tax attorneys advising their public clients.

*Associate Professor, Thomas M. Cooley Law School, Auburn Hills, Michigan


Published by the
American Bar Association Section of Taxation
in Collaboration with the
Georgetown University Law Center


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