Wednesday, May 21, 2008

The Supremes Come To Kentucky's Rescue

In an ironic twist, Kentucky benefited from a smack down of the Commonwealth's highest court by the U.S. Supreme Court on Monday. The nation's highest court reversed a Kentucky Supreme Court ruling that had held unconstitutional the Commonwealth's tax exemption of Kentucky-issued, but not out-of-state, municipal bonds. The benefit for Kentuckians from the U.S. Supreme Court ruling is that it gives governmental entities in Kentucky a leg up over out-of-state governments in attracting capital for public projects, such as the new basketball arena being built in Louisville.

Also, as The Motley Fool explains:

Had the decision gone the other way, it would likely have roiled the municipal bond market. States would likely have concluded that if they couldn't collect taxes just on muni bonds issued out-of-state, they'd have to get rid of the interest exemption entirely. That would've instantly led to higher interest rates, lowering the value of muni bonds in high-tax states. Bond fund shares -- especially those of the more than $150 billion in funds that focus on bonds from single states -- could have suffered a huge drop as a result.

The ultimate result likely would have been higher interest rates for municipal bond projects, which, in turn, would increase the costs of such endeavors.

The big media story involving Kentucky this week concerns, of course, yesterday's primary. But perhaps the most important event this week -- the municipal bonds ruling -- was buried in the business section. Funny how the news is reported.

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