Bogus Argumentation, Fluffy Principles, and Fodder for Debate

I attest that a good source of "comedic amusement" is to reflect on lawyer arguments, especially in Supreme Court debates. A recent article I read on a "subtle nuance" (hehe...is that redundant?) in tax law concerns a case currently up for debate and is one which illustrates my amusement quite well. It's also very relevant to individual taxation (corps, trusts, and partnership variations are also a fun-filled circus in themselves, but I won't get into that just yet).

Specifically I refer to this: Department of Revenue of Kentucky v. Davis, No. 06-666.

That sounds sexy already, doesn't it? If I also threw out the random fact we are dealing with a 2.5 trillion tax dollar market, and this revenue concerns 38 states in question, does that help the mental shift (read: kind of important) at all?

In tax law, there is a general rulestating that interest on municipal bonds (i.e., "bonds" just being long-term debt issued by a state, city or other local government) from a state will be exempt from income taxation within its own state of issuance. If an investor wishes to invest in bonds outside of one's residence state, the interest on these non-resident bonds will be taxable within that investor's resident state. Muni-bonds are also tax-free for Federal purposes, but that element is not the issue in question. Instead, the interstate impact of this rule is the focus.

Amid the captivating display given last week on Nov. 5th, I must sarcastically admit our resources were once again well spent to serve the greater good. That is, for the sole purpose of achieving justice, and setting straight the constitutional clarity of our times. In all seriousness, these reasons are precisely why the Supreme Court felt it necessary to saunter through a muck of nearly 50 years of "unclearly dictated conclusions" in precedent law only to find that the most relevant case rulings for the general bond rule above are a discussion over the essence of "garbage" versus "milk."

....huh?

Let me clarify how this kind of makes sense:

a) "Garbage," is an extensively pliable product (by-product?) to states in terms of its consideration for preferential tax treatment. States would like to say that non-resident bond interest can be taxed on the state level, since the commerce clause doesn't govern activities engaged in solely "on behalf of its people."

b) "Milk," however, is a commodity product of the dairy market, which in turn is a part of agriculture, an industry which has historically been protected by states through heavy Federal subsidization. Individual state treatment has been to exempt the dairy market from protectionism between states, also citing the commerce clause.

Here comes the fun part:

If munis are like "garbage," the rule should remain as it currently stands. Simply because the state has the ability to discriminate in favor of itself. This is the current position of 49 states, regardless of whether or not they actually have a state income tax. Why do states favor this decision on how to treat muni-bonds? It's not counter-intuitive. Discriminating in favor of oneself will most likely have the best outcome for oneself, at least in the short term. Here is where the annual $2.5 trillion comes into play. It's also useful to know that the current treatment of muni bonds is based on a particular garbage case where "rates charged by a state created monopoly in New York to dispose of trash were higher than those charged by private-sector competitors, but the state chose instead to use the public-monopoly." The states serve to gain from their actions by increased revenue, but will lose dearly as continual increases from inefficiencies decrease the useful value of this already enormous amount of income.

On the flip side (and the one to which I agree), if munis are like "milk," they shouldn't be given preferential treatment, since "preferential" means either they are taxed or exempted based on the outline to the general rule. According to state policy, munis cannot have protectionist barriers, similar to the treatment of agriculture. If bond interest is not protected by certain states through inter-state transactions then the only viable options under this assumption are to either tax all muni bond interest at the state level, including resident bonds, or exempt all muni interest altogether from any form of state-level taxation.

Is individual exploitation of labor a necessary wedge between determining the public good and the public's tax dollars? Obviously it shouldn't be, but the latter creates this exploitation. That is why I argue that all muni bonds should be exempted from taxation at the state level. It is, simply put, the only feasible way to eliminate the barriers existing between inter-state commerce. If state monopolies were not allowed to exist in the first place, they wouldn't have the option of choosing in favor of itself (whatever the elusive conglomerate of "state" is we speak of, anyway) even though it's not the best for all, as in the New York garbage case. There is way more to write here, but I'm sooooo sleepy.

Ugh, and this has easily turned into sounding like a written a paper or something. Why does that always happen when I least expect it?

For more on this, see here and here.

Ah, the sweet solace of sleep will shortly be upon me. I'm so there…….