DEPARTMENT OF REVENUE OF KENTUCKY et al. v. DAVIS et ux.

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328 OCTOBER TERM, 2007
Syllabus
DEPARTMENT OF REVENUE OF KENTUCKY et al. v.
DAVIS et ux.
certiorari to the court of appeals of kentucky
No. 06–666. Argued November 5, 2007—Decided May 19, 2008
Kentucky exempts from state income taxes interest on bonds issued by it
or its political subdivisions but not on bonds issued by other States and
their subdivisions. After paying state income tax on out-of-state mu
nicipal bonds, respondents sued petitioners (hereinafter Kentucky) for
a refund, claiming that Kentucky’s differential tax impermissibly dis
criminated against interstate commerce. The trial court ruled for Ken
tucky, relying in part on a “market-participation” exception to the dor
mant Commerce Clause limit on state regulation. The State Court of
Appeals reversed, finding that Kentucky’s scheme ran afoul of the Com
merce Clause.
Held: The judgment is reversed, and the case is remanded.
197 S. W. 3d 557, reversed and remanded.
Justice Souter delivered the opinion of the Court, except as to
Part III–B, concluding that Kentucky’s differential tax scheme does not
offend the Commerce Clause. Pp. 337–343, 349–357.
(a) Modern dormant Commerce Clause law is driven by concern about
“economic protectionism—that is, regulatory measures designed to ben
efit in-state economic interests by burdening out-of-state competitors,”
New Energy Co. of Ind. v. Limbach, 486 U. S. 269, 273–274—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 Environmen
tal Quality of Ore., 511 U. S. 93, 99. 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, reflecting a “basic
distinction . . . between States as market participants and States as
market regulators,” Reeves, Inc. v. Stake, 447 U. S. 429, 436. Last
Term, in a case decided independently of the market participant excep
tion, this Court upheld an ordinance requiring trash haulers to deliver
solid waste to a public authority’s processing plant, finding that it ad
dressed 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.

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v. Oneida-Herkimer Solid Waste Management Authority, 550 U. S. 330,
344, 342. Pp. 337–340.
(b) United Haulers provides a firm basis for reversal here. The logic
that a government function is not susceptible to standard dormant Com
merce Clause scrutiny because it is likely motivated by legitimate objec
tives 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 shoul
der the cardinal civic responsibilities listed in United Haulers: protect
ing citizens’ health, safety, and welfare. And United Haulers’ appre
hension 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 discrim
ination assumes a comparison of substantially similar entities,” 550
U. S., at 342. Viewed through the lens of Bonaparte v. Tax Court, 104
U. S. 592, there is no forbidden discrimination because Kentucky, as a
public entity, does not have to treat itself as being “substantially simi
lar” to other bond issuers in the market. Pp. 341–343.
(c) A look at the specific markets in which the exemption’s effects are
felt confirms that no traditionally forbidden discrimination is underway
and points to the tax policy’s distinctive character. In both the inter
state market as most broadly conceived—issuers and holders of all
fixed-income securities—and the more specialized market—commerce
solely in federally tax-exempt municipal bonds, often conducted through
interstate municipal bond funds—nearly every taxing State believes its
public interests are served by the same tax-and-exemption feature
which is supported in this Court by every State. These facts suggest
that no State perceives any local advantage or disadvantage beyond the
permissible ones open to a government and to those who deal with that
government when it enters the market. An equally significant percep
tion emerges from examining the market for municipal bonds within the
issuing State, a large proportion of which market is managed by one or
more single-state funds. An important feature of such markets is that
intrastate funds absorb securities issued by smaller or lesser known
municipalities that interstate markets tend to ignore. Many single
state funds would likely disappear if the current differential tax schemes
were upset, and there is no suggestion that the interstate markets
would welcome the weaker municipal issues that would lose their local
market homes after a Davis victory. Financing for long-term municipal

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330 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Syllabus
improvements would thus change radically if the differential tax feature
disappeared. The fact that the differential tax scheme is critical to the
operation of an identifiable segment of the current municipal financial
market demonstrates that the States’ unanimous desire to preserve the
scheme is a far cry from the private protectionism that has driven the
dormant Commerce Clause’s development. Pp. 349–353.
(d) The Court generally applies the rule in Pike v. Bruce Church,
Inc., 397 U. S. 137, 142, that even nondiscriminatory burdens on com
merce may be struck down on a showing that they clearly outweigh the
benefits of a state or local practice. But the current record and schol
arly material show that the Judicial Branch is not institutionally suited
to draw reliable conclusions of the kind that would be necessary for the
Davises to satisfy a Pike burden in this particular case. Pp. 353–356.
Souter, J., announced the judgment of the Court and delivered the
opinion of the Court, except as to Part III–B. Stevens and Breyer, JJ.,
joined that opinion in full; Roberts, C. J., and Ginsburg, J., joined all but
Part III–B; and Scalia, J., joined all but Parts III–B and IV. Stevens,
J., filed a concurring opinion, post, p. 357. Roberts, C. J., post, p. 359,
and Scalia, J., post, p. 359, filed opinions concurring in part. Thomas, J.,
filed an opinion concurring in the judgment, post, p. 361. Kennedy, J.,
filed a dissenting opinion, in which Alito, J., joined, post, p. 362. Alito,
J., filed a dissenting opinion, post, p. 376.
C. Christopher Trower argued the cause for petitioners.
With him on the briefs were Gwen R. Pinson and Douglas
M. Dowell.
G. Eric Brunstad, Jr., argued the cause for respondents.
With him on the brief were Rheba Rutkowski, M. Stephen
Dampier, Charles R. Watkins, John R. Wylie, David J.
Guin, Tammy McClendon Stokes, Irvin D. Foley, Anthony
G. Raluy, M. Scott Barrett, Charles S. Zimmerman, Hart L.
Robinovitch, Michael C. Moran, Arthur T. Susman, Mat
thew T. Hurst, and Matthew T. Heffner.*
*Briefs of amici curiae urging reversal were filed for the State of North
Carolina et al. by Roy Cooper, Attorney General of North Carolina, Chris
topher G. Browning, Jr., Kay Linn Miller Hobart, and Gregory P. Roney,
and by the Attorneys General for their respective States as follows: Troy
King of Alabama, Talis J. Colberg of Alaska, Terry Goddard of Arizona,
Dustin McDaniel of Arkansas, Edmund G. Brown, Jr., of California, John

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Opinion of the Court
Justice Souter delivered the opinion of the Court, ex
cept as to Part III–B.†
For the better part of two centuries States and their politi
cal subdivisions have issued bonds for public purposes, and
for nearly half that time some States have exempted interest
W. Suthers of Colorado, Richard Blumenthal of Connecticut, Joseph R.
Biden III of Delaware, Bill McCollum of Florida, Thurbert E. Baker of
Georgia, Mark J. Bennett of Hawaii, Lawrence Wasden of Idaho, Lisa
Madigan of Illinois, Steve Carter of Indiana, Tom Miller of Iowa, Paul
Morrison of Kansas, Charles C. Foti, Jr., of Louisiana, G. Steven Rowe of
Maine, Douglas F. Gansler of Maryland, Martha Coakley of Massachu
setts, Michael A. Cox of Michigan, Lori Swanson of Minnesota, Jim Hood
of Mississippi, Jeremiah W. (Jay) Nixon of Missouri, Mike McGrath of
Montana, Jon Bruning of Nebraska, Catherine Cortez Masto of Nevada,
Kelly A. Ayotte of New Hampshire, Anne Milgram of New Jersey, Gary
King of New Mexico, Andrew M. Cuomo of New York, Wayne Stenehjem
of North Dakota, Marc Dann of Ohio, W. A. Drew Edmondson of Okla
homa, Hardy Myers of Oregon, Thomas J. Corbett, Jr., of Pennsylvania,
Patrick Lynch of Rhode Island, Henry McMaster of South Carolina, Law
rence E. Long of South Dakota, Robert E. Cooper, Jr., of Tennessee, Greg
Abbott of Texas, Mark L. Shurtleff of Utah, William H. Sorrell of Ver
mont, Bob McDonnell of Virginia, Robert M. McKenna of Washington,
Darrell V. McGraw, Jr., of West Virginia, J. B. Van Hollen of Wisconsin,
and Patrick J. Crank of Wyoming; for the Churchill Tax-Free Fund of
Kentucky et al. by Michael F. Smith, Philip J. Kessler, and Dennis K.
Egan; for Dupree Mutual Funds by P. Anthony Sammons; for the Govern
ment Finance Officers Association et al. by Richard Ruda; for the National
Association of State Treasurers by Robert A. Long, Theodore P. Metzler,
Richard L. Sigal, and Richard A. Cordray; for Nuveen Investments, Inc.,
by Barry Sullivan and J. Kevin McCall; and for the Securities Industry
and Financial Markets Association by Carter G. Phillips, Richard D. Bern
stein, A. Robert Pietrzak, Daniel A. McLaughlin, Kevin M. Carroll, and
Leslie M. Norwood.
Briefs of amici curiae urging affirmance were filed for the Tax Founda
tion by Brian E. Bailey; and for Alan D. Viard et al. by Lucinda O.
McConathy.
Briefs of amici curiae were filed for the Multistate Tax Commission by
Sheldon H. Laskin; and for the National Federation of Municipal Analysts
by Leonard Weiser-Varon, William C. Brashares, Maxwell D. Solet, and
Noah C. Shaw.
†Justice Ginsburg joins all but Part III–B of this opinion.

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332 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Opinion of the Court
on their own bonds from their state income taxes, which are
imposed on bond interest from other States. The ques
tion here is whether Kentucky’s version of this differential
tax scheme offends the Commerce Clause. We hold that it
does not.
I
A
Like most other States, the Commonwealth of Kentucky
taxes its residents’ income. See Ky. Rev. Stat. Ann.
§ 141.020(1) (West 2006). The tax is assessed on “net in
come,” see ibid., calculated by reference to “gross income” as
defined by the Internal Revenue Code, see §§ 141.010(9)–(11)
(West Supp. 2007),1 which excludes “interest on any State or
local bond” (“municipal bond,” for short 2), 26 U. S. C. § 103(a).
1 Specifically, Kentucky defines “net income” for noncorporate taxpayers
as “adjusted gross income,” minus certain deductions. See Ky. Rev. Stat.
Ann. § 141.010(11). “Adjusted gross income,” in turn, is defined as “gross
income” minus other deductions spelled out in the Internal Revenue Code
and elsewhere in the Kentucky statutes. See § 141.010(10). Finally,
“gross income” has the same meaning set out in § 61 of the Internal Reve
nue Code. See § 141.010(9); see also 26 U. S. C. § 61.
2 “Municipal bond” is commonly defined as a “debt obligation of a state
or local government entity.” J. Downes & J. Goodman, Dictionary of Fi
nance and Investment Terms 439 (7th ed. 2006). We use that definition
here; our references to “municipal bonds” thus include bonds issued by
States and their political subdivisions.
An argument raised by one of the Davises’ amici focuses on so-called
“private-activity,” “industrial-revenue,” or “conduit” bonds, a subset of
municipal bonds used to finance projects by private entities. These bonds
are often (but not always) exempt under the Kentucky scheme. Amici
contend that Kentucky’s exemption of these bonds, at the very least,
plainly violates the Commerce Clause. See Brief for Alan D. Viard et al.
as Amici Curiae 25–26. This argument, however, was not considered
below, was never pressed by the Davises themselves, and is barely devel
oped by amici. Moreover, we cannot tell with certainty what the conse
quences would be of holding that Kentucky violates the Commerce Clause
by exempting such bonds; we must assume that it could disrupt important
projects that the States have deemed to have public purposes. Accord
ingly, it is best to set this argument aside and leave for another day any

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Kentucky piggybacks on this exclusion, but only up to a
point: it adds “interest income derived from obligations of
sister states and political subdivisions thereof ” back into the
taxable net. Ky. Rev. Stat. Ann. § 141.010(10)(c). Interest
on bonds issued by Kentucky and its political subdivisions is
thus entirely exempt,3 whereas interest on municipal bonds
of other States and their subdivisions is taxable. (Interest
on bonds issued by private entities is taxed by Kentucky
regardless of the private issuer’s home.)
The ostensible reason for this regime is the attractiveness
of tax-exempt bonds at “lower rates of interest . . . than that
paid on taxable . . . bonds of comparable risk.” M. Graetz &
D. Schenk, Federal Income Taxation 215 (5th ed. 2005) (here
inafter Graetz & Schenk). Under the Internal Revenue
Code, for example, see 26 U. S. C. § 103, “if the market rate
of interest is 10 percent on a comparable corporate bond, a
municipality could pay only 6.5 percent on its debt and a
purchaser in a 35 percent marginal tax bracket would be
indifferent between the municipal and the corporate bond,
since the after-tax interest rate on the corporate bond is
6.5 percent,” Graetz & Schenk 215.4 The differential tax
scheme in Kentucky works the same way; the Common
wealth’s tax benefit to residents who buy its bonds makes
claim that differential treatment of interest on private-activity bonds
should be evaluated differently from the treatment of municipal bond in
terest generally.
3 There are some exceptions which derive from the federal exclusion,
see 26 U. S. C. § 103(b), but they do not matter here.
4 The amount of this benefit to municipal issuers can be approximated
by comparing the interest rates on municipal bonds to those on Treasury
bonds, which are also exempt from state taxation but are subject to fed
eral taxation. “[A]t the end of 2006, the borrowing costs on AAA-rated,
10-year municipal bonds on average were 80.3 percent of comparable, but
federally taxable, U. S. Treasury securities, [and] at the end of 2005 the
borrowing costs on such municipal bonds were 88.4 percent of comparable
U. S. Treasury bonds.” Brief for National Federation of Municipal Ana
lysts as Amicus Curiae 8, n. 4 (hereinafter National Federation Brief).

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334 DEPARTMENT OF REVENUE OF KY. v. DAVIS
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lower interest rates acceptable,5 while limiting the exception
to Kentucky bonds raises in-state demand for them without
also subsidizing other issuers.
The significance of the scheme is immense. Between 1996
and 2002, Kentucky and its subdivisions issued $7.7 billion in
long-term bonds to pay for spending on transportation, pub
lic safety, education, utilities, and environmental protection,
among other things. IRS, Statistics of Income Bulletin,
C. Belmonte, Tax-Exempt Bonds, 1996–2002, pp. 169–170,
http://www.irs.gov/pub/irs-soi/02govbnd.pdf (as visited Jan.
23, 2008, and available in Clerk of Court’s case file). Across
the Nation during the same period, States issued over $750
billion in long-term bonds, with nearly a third of the money
going to education, followed by transportation (13%) and
utilities (11%). See ibid. Municipal bonds currently fi
nance roughly two-thirds of capital expenditures by state
and local governments. L. Thomas, Money, Banking and Fi
nancial Markets 55 (2006).
Funding the work of government this way follows a tradi
tion going back as far as the 17th century. See Johnson &
Rubin, The Municipal Bond Market: Structure and Changes,
in Handbook of Public Finance 483, 485 (F. Thompson & M.
Green eds. 1998) (“[In] 1690 . . . Massachusetts issued bills of
credit to pay soldiers who had participated in an unsuccessful
raid on the City of Quebec”). Municipal bonds first ap
peared in the United States in the early 19th century: “New
York City began to float [debt] securities in about 1812,” A.
Hillhouse, Municipal Bonds: A Century of Experience 31
(1936) (hereinafter Hillhouse), and by 1822 Boston “had a
bonded debt of $100,000,” id., at 32. The municipal bond
market had swelled by the mid-1840s, when the aggregate
5 The precise reduction in interest rates depends on the federal and state
income tax rates, the credit rating of the issuer, the term of the bond, and
market factors. See id., at 8. The reduction in interest rates is gener
ally greater the higher are a State’s income tax rates. See id., at 9, and
n. 6.

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debt of American cities exceeded $27 million, and the total
debt of the States was nearly 10 times that amount. See
ibid. Bonds funded some of the great public works of the
day, including New York City’s first water system, see id., at
31, and the Erie Canal, see R. Amdursky & C. Gillette, Mu
nicipal Debt Finance Law § 1.2.1, p. 15 (1992) (hereinafter
Amdursky & Gillette). At the turn of the 20th century, the
total state and municipal debt was closing in on $2 billion,
see Hillhouse 35, and by the turn of the millennium, over
“$1.5 trillion in municipal bonds were outstanding,” J. Temel,
The Fundamentals of Municipal Bonds, p. ix (5th ed. 2001).
Differential tax schemes like Kentucky’s have a long pedi
gree, too. State income taxation became widespread in the
early 20th century, see A. Comstock, State Taxation of Per
sonal Incomes 11 (1921) (reprinted 2005) (hereinafter Com
stock), and along with the new tax regimes came exemptions
and deductions, see id., at 171–184, to induce all sorts of eco
nomic behavior, including lending to state and local govern
ments at favorable rates of untaxed interest. New York
enacted the first of these statutes in 1919, see 1919 N. Y.
Laws pp. 1641–1642, the same year it imposed an income tax,
see Comstock 104,6 and other States followed, see, e. g., 1921
N. C. Sess. Laws p. 208; 1923 N. H. Laws p. 78; 1926 Va. Acts
ch. 576, pp. 960–961, with Kentucky joining the pack in 1936,
see 1936 Ky. Acts p. 71. Today, 41 States have laws like the
one before us.7
6 The Federal Government got in the game even earlier. Municipal
bonds were exempted from “every federal income tax act enacted since
passage of the Sixteenth Amendment” in 1913. Amdursky & Gillette
§ 7.2.1, at 440.
7 This figure includes Kentucky and 36 other States that have schemes
that are nearly identical to Kentucky’s. See Ala. Code §§ 40–18–4, 40–18–
14(3)(f) (2003); Ariz. Rev. Stat. Ann. § 43–1021(3) (West Supp. 2007); Ark.
Code Ann. § 26–51–404(b)(5) (Supp. 2007); Cal. Rev. & Tax. Code Ann.
§ 17133 (West 2004); Colo. Rev. Stat. Ann. § 39–22–104(3)(b) (2007); Conn.
Gen. Stat. § 12–701(a)(20)(A)(i) (2007); Del. Code Ann., Tit. 30, § 1106(a)(1)
(1997); Ga. Code Ann. § 48–7–27(b)(1)(A) (2005); Haw. Rev. Stat. §§ 39–11,

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336 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Opinion of the Court
B
Petitioners (for brevity, Kentucky or the Commonwealth)
collect the Kentucky income tax. Respondents George and
Catherine Davis are Kentucky residents who paid state in
come tax on interest from out-of-state municipal bonds, and
then sued the tax collectors in state court on a refund claim
that Kentucky’s differential taxation of municipal bond in
come impermissibly discriminates against interstate com
merce in violation of the Commerce Clause of the National
Constitution. The trial court granted judgment to the Com
47–13 (1993), 235–7(a)(6), (b)(2) (2001); Idaho Code §§ 63–3022M(1), (3)(b)
(Lexis 2007); Kan. Stat. Ann. § 79–32,117(b)(i) (2006 Cum. Supp.); La. Stat.
Ann. §§ 47:48, 47:293(9)(a), (b) (West 2001 and Supp. 2008); Me. Rev. Stat.
Ann., Tit. 36, § 5122(1)(A) (Supp. 2007); Md. Tax-Gen. Code Ann. § 10–
204(b) (Lexis Supp. 2007); Mass. Gen. Laws, ch. 62, § 2(a)(1)(A) (West 2006);
Mich. Comp. Laws Ann. § 206.30(1)(a) (West Supp. 2007); Minn. Stat.
§ 290.01, subd. 19a(1)(i) (2006); Miss. Code Ann. § 27–7–15(4)(d) (Supp.
2007); Mo. Rev. Stat. § 143.121(2)(b) (2007 Supp.); Mont. Code Ann. § 15–30–
111(2)(a)(i) (2007); Neb. Rev. Stat. § 77–2716(1)(c) (2007 Supp.); N. H. Rev.
Stat. Ann. § 77:4(I) (Supp. 2007); N. J. Stat. Ann. § 54A:6–14 (West 2002);
N. M. Stat. Ann. §§ 7–2–2(B)(3), (V) (2005); N. Y. Tax Law Ann. § 612(b)(1)
(West 2006); N. C. Gen. Stat. Ann. §§ 105–134.6(b)(1)(b), (c)(1) (Lexis
2005); N. D. Cent. Code Ann. § 57–38–01.2(1)(g) (Lexis Supp. 2007); Ohio
Rev. Code Ann. § 5747.01(A)(1) (Lexis Supp. 2007); Ore. Rev. Stat.
§ 316.680(2)(a) (2003); Pa. Stat. Ann., Tit. 72, § 9901 (Purdon 2000); R. I.
Gen. Laws § 44–30–12(b)(1) (Supp. 2007); S. C. Code Ann. § 12–6–1120(1)
(2000); Tenn. Code Ann. § 67–2–104(e)(1) (2006); Vt. Stat. Ann., Tit. 32,
§ 5811(18)(A)(i)(II) (2007); Va. Code Ann. §§ 58.1–322(B)(1), (C)(2) (Lexis
Supp. 2007); W. Va. Code Ann. §§ 11–21–12(b)(1), (c)(2) (Lexis Supp. 2007).
It also includes four States that tax out-of-state municipal bonds and ex
empt some, but not all, in-state municipal bonds. See Iowa Code
§ 422.7(36) (2005); Okla. Stat., Tit. 68, §§ 2358.5, 2358.5A (West 2007 Supp.);
Wis. Stat. § 71.05(1)(c) (2003–2004); compare Ill. Comp. Stat., ch. 35, § 5/
203(a)(2)(A) (West 2006), with ch. 45, § 35/80(e). Of the remaining States,
Utah exempts its own bonds, and extends reciprocal treatment to the
bonds of States that do not tax Utah bonds, see Utah Code Ann. §§ 59–10–
114(1)(g), (6) (Lexis 2007 Supp.); Indiana exempts all municipal bonds, see
Ind. Code § 6–3–1–3.5 (West 2004); and the balance have no personal in
come tax.

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monwealth, relying in part on our cases recognizing the
“market-participant” exception to the dormant Commerce
Clause limit on state regulation. See App. to Pet. for Cert.
A18–A19 (citing Reeves, Inc. v. Stake, 447 U. S. 429 (1980),
and Hughes v. Alexandria Scrap Corp., 426 U. S. 794 (1976)).
The Court of Appeals of Kentucky reversed. See 197
S. W. 3d 557 (2006). In a brief discussion, it rejected the
reasoning of an Ohio case upholding a similar tax scheme
challenged under the Commerce Clause, see id., at 563 (dis
cussing Shaper v. Tracy, 97 Ohio App. 3d 760, 647 N. E. 2d
550 (1994)), and distinguished our market participant cases,
see 197 S. W. 3d, at 564, as well as a decision from the 19th
century the Commonwealth relied on, see id., at 563–564 (dis
cussing Bonaparte v. Tax Court, 104 U. S. 592 (1882)). The
Court of Appeals thought it had “no choice but to find that
Kentucky’s system of taxing only extraterritorial bonds runs
afoul of the Commerce Clause,” 197 S. W. 3d, at 564, and
the Supreme Court of Kentucky denied the Commonwealth’s
motion for discretionary review, see App. to Pet. for
Cert. A14.
We granted certiorari owing to the conflict this raised on
an important question of constitutional law, and because the
result reached casts constitutional doubt on a tax regime
adopted by a majority of the States. 550 U. S. 956 (2007).
We now reverse.
II
The Commerce Clause empowers Congress “[t]o regulate
Commerce . . . among the several States,” Art. I, § 8, cl. 3,
and although its terms do not expressly restrain “the several
States” in any way, we have sensed a negative implication in
the provision since the early days, see, e. g., Cooley v. Board
of Wardens of Port of Philadelphia ex rel. Soc. for Relief of
Distressed Pilots, 12 How. 299, 318–319 (1852); cf. Gibbons v.
Ogden, 9 Wheat. 1, 209 (1824) (Marshall, C. J.) (dictum). The
modern law of what has come to be called the dormant Com
merce Clause is driven by concern about “economic protec

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338 DEPARTMENT OF REVENUE OF KY. v. DAVIS
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tionism—that is, regulatory measures designed to benefit
in-state economic interests by burdening out-of-state com
petitors.” New Energy Co. of Ind. v. Limbach, 486 U. S. 269,
273–274 (1988). The point is to “effectuat[e] the Framers’
purpose to ‘prevent a State from retreating into [the] eco
nomic isolation,’ ” Fulton Corp. v. Faulkner, 516 U. S. 325,
330 (1996) (quoting Oklahoma Tax Comm’n v. Jefferson
Lines, Inc., 514 U. S. 175, 180 (1995); brackets omitted), “that
had plagued relations among the Colonies and later among
the States under the Articles of Confederation,” Hughes v.
Oklahoma, 441 U. S. 322, 325–326 (1979).
The law has had to respect a cross-purpose as well, for the
Framers’ distrust of economic Balkanization was limited by
their federalism favoring a degree of local autonomy. Com
pare The Federalist Nos. 7 (A. Hamilton), 11 (A. Hamilton),
and 42 (J. Madison), with The Federalist No. 51 (J. Madison);
see also Garcia v. San Antonio Metropolitan Transit Au
thority, 469 U. S. 528, 546 (1985) (“The essence of our federal
system is that within the realm of authority left open to
them under the Constitution, the States must be equally free
to engage in any activity that their citizens choose for the
common weal”).
Under the resulting protocol for dormant Commerce
Clause analysis, we ask whether a challenged law discrim
inates against interstate commerce. See Oregon Waste Sys
tems, Inc. v. Department of Environmental Quality of Ore.,
511 U. S. 93, 99 (1994). A discriminatory law is “virtually
per se invalid,” ibid.; see also Philadelphia v. New Jersey,
437 U. S. 617, 624 (1978), and will survive only if it “advances
a legitimate local purpose that cannot be adequately served
by reasonable nondiscriminatory alternatives,” Oregon
Waste Systems, supra, at 101 (internal quotation marks omit
ted); see also Maine v. Taylor, 477 U. S. 131, 138 (1986). Ab
sent discrimination for the forbidden purpose, however,
the law “will be upheld unless the burden imposed on [inter
state] commerce is clearly excessive in relation to the puta

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tive local benefits.” Pike v. Bruce Church, Inc., 397 U. S.
137, 142 (1970). State laws frequently survive this Pike
scrutiny, see, e. g., United Haulers Assn., Inc. v. Oneida-
Herkimer Solid Waste Management Authority, 550 U. S.
330, 346–347 (2007) (plurality opinion); Northwest Central
Pipeline Corp. v. State Corporation Comm’n of Kan., 489
U. S. 493, 525–526 (1989); Minnesota v. Clover Leaf Cream
ery Co., 449 U. S. 456, 472–474 (1981), though not always, as
in Pike itself, 397 U. S., at 146.
Some cases run a different course, however, and an excep
tion covers States that go beyond regulation and themselves
“participat[e] in the market” so as to “exercis[e] the right to
favor [their] own citizens over others.” Alexandria Scrap,
supra, at 810. This “market-participant” exception re
flects a “basic distinction . . . between States as market par
ticipants and States as market regulators,” Reeves, 447 U. S.,
at 436, “[t]here [being] no indication of a constitutional plan
to limit the ability of the States themselves to operate freely
in the free market,” id., at 437. See also White v. Massa
chusetts Council of Constr. Employers, Inc., 460 U. S. 204,
208 (1983) (“[W]hen a state or local government enters the
market as a participant it is not subject to the restraints
of the Commerce Clause”). Thus, in Alexandria Scrap, we
found that a state law authorizing state payments to proces
sors of automobile hulks validly burdened out-of-state proc
essors with more onerous documentation requirements than
their in-state counterparts. Likewise, Reeves accepted
South Dakota’s policy of giving in-state customers first dibs
on cement produced by a state-owned plant, and White held
that a Boston executive order requiring half the workers
on city-financed construction projects to be city residents
passed muster.
Our most recent look at the reach of the dormant Com
merce Clause came just last Term, in a case decided inde
pendently of the market participation precedents. United
Haulers, supra, upheld a “flow control” ordinance requiring

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340 DEPARTMENT OF REVENUE OF KY. v. DAVIS
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trash haulers to deliver solid waste to a processing plant
owned and operated by a public authority in New York State.
We found “[c]ompelling reasons” for “treating [the ordinance]
differently from laws favoring particular private businesses
over their competitors.” Id., at 342. State and local gov
ernments that provide public goods and services on their
own, unlike private businesses, are “vested with the respon
sibility of protecting the health, safety, and welfare of [their]
citizens,” ibid., and laws favoring such States and their sub
divisions may “be directed toward any number of legitimate
goals unrelated to protectionism,” id., at 343. That was true
in United Haulers, where the ordinance addressed waste dis
posal, “both typically and traditionally a local government
function.” Id., at 344 (quoting United Haulers Assn., Inc. v.
Oneida-Herkimer Solid Waste Management Authority, 261
F. 3d 245, 264 (CA2 2001) (Calabresi, J., concurring); internal
quotation marks omitted). And if more had been needed to
show that New York’s object was consequently different
from forbidden protectionism, we pointed out that “the most
palpable harm imposed by the ordinances—more expensive
trash removal—[was] likely to fall upon the very people who
voted for the laws,” rather than out-of-state interests.
United Haulers, 550 U. S., at 345. Being concerned that a
“contrary approach . . . would lead to unprecedented and un
bounded interference by the courts with state and local gov
ernment,” id., at 343, we held that the ordinance did “not
discriminate against interstate commerce for purposes of the
dormant Commerce Clause,” id., at 342.8
8 In so holding, we distinguished our decision in C & A Carbone, Inc. v.
Clarkstown, 511 U. S. 383 (1994), which struck down a very similar ordi
nance on Commerce Clause grounds. The Carbone ordinance, however,
benefited a private processing facility, and we found “this difference con
stitutionally significant” for the reasons adverted to in the main text. See
United Haulers, 550 U. S., at 334. Although the Carbone dissent argued
that the private facility was “essentially a municipal facility,” 511 U. S., at
419 (opinion of Souter, J.), United Haulers relied on the apparent view

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III
A
It follows a fortiori from United Haulers that Kentucky
must prevail. In United Haulers, we explained that a gov
ernment function is not susceptible to standard dormant
Commerce Clause scrutiny owing to its likely motivation by
legitimate objectives distinct from the simple economic pro
tectionism the Clause abhors. See id., at 343 (“Laws favor
ing local government . . . may be directed toward any number
of legitimate goals unrelated to protectionism”); see also id.,
at 344 (noting that “[w]e should be particularly hesitant to
interfere . . . under the guise of the Commerce Clause” where
a local government engages in a traditional government
function).9 This logic applies with even greater force to
of the Carbone majority that the facility was properly characterized as
private, see 550 U. S., at 339–340.
9 Justice Kennedy’s dissent (hereinafter dissent) says this is just cir
cular rationalization, that the United Haulers acceptance of governmental
preference in support of public health, safety, and welfare is the equivalent
of justifying the law as an exercise of the “ ‘police power’ ” and thus an
exercise in “tautology,” since almost any state law could be so justified.
See post, at 365. But this misunderstands what we said in United Haul
ers. The point of asking whether the challenged governmental prefer
ence operated to support a traditional public function was not to draw fine
distinctions among governmental functions, but to find out whether the
preference was for the benefit of a government fulfilling governmental
obligations or for the benefit of private interests, favored because they
were local. Under United Haulers, governmental public preference is
constitutionally different from commercial private preference, and we
make the governmental responsibility enquiry to identify the beneficiary
as one or the other. See supra, at 339–340; United Haulers, supra, at
343. Because this is the distinction at which the enquiry about traditional
governmental activity is aimed, it entails neither tautology nor the hope
less effort to pick and choose among legitimate governmental activity that
led to Garcia v. San Antonio Metropolitan Transit Authority, 469 U. S.
528 (1985).
One of the two fundamental points of difference between the Court and
the dissenters is the dissenters’ rejection of the constitutional distinction
between public and private preference, see post, at 367, 371, 372; the dis

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342 DEPARTMENT OF REVENUE OF KY. v. DAVIS
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laws favoring a State’s municipal bonds, given that the issu
ance of debt securities to pay for public projects is a quintes
sentially public function, with the venerable history we have
already sketched, see supra, at 334–335. By issuing bonds,
state and local governments “sprea[d] the costs of public
projects over time,” Amdursky & Gillette § 1.1.3, at 11, much
as one might buy a house with a loan subject to monthly
payments. Bonds place the cost of a project on the citizens
who benefit from it over the years, see ibid., and they allow
for public work beyond what current revenues could support,
see id., § 1.2, at 12–13. Bond proceeds are thus the way to
shoulder the cardinal civic responsibilities listed in United
Haulers: protecting the health,10 safety,11 and welfare 12 of
citizens. It should go without saying that the apprehension
in United Haulers about “unprecedented . . . interference”
with a traditional government function is just as warranted
here, where the Davises would have us invalidate a century
old taxing practice, see supra, at 335, presently employed by
41 States, see n. 7, supra, and affirmatively supported by all
of them, see Brief for 49 States as Amici Curiae.
In fact, this emphasis on the public character of the en
terprise supported by the tax preference is just a step in
addressing a fundamental element of dormant Commerce
Clause jurisprudence, the principle that “any notion of dis
crimination assumes a comparison of substantially similar
entities.” United Haulers, supra, at 342 (quoting General
senters thus carry on the battle that was fought in United Haulers. (The
second fundamental difference goes to the realism and legitimacy of treat
ing bond issuance and tax provisions as aggregated features of a single
scheme of public finance. Compare infra, at 344–345, with post, at 367,
374–375.)
10 See, e. g., The Bond Buyer, Apr. 20, 2007, p. 31, col. 2 (describing bond
issue by the Grayson County Public Hospital District Corporation).
11 See, e. g., id., June 20, 2007, at 29, col. 3 (describing bond issue by Todd
County for a “Detention Facility Project”).
12 See, e. g., id., Apr. 20, 2007, at 31, cols. 2–3 (describing bond issue by
the Johnson County School District Finance Corporation).

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Motors Corp. v. Tracy, 519 U. S. 278, 298 (1997); internal quo
tation marks omitted). In Bonaparte, 104 U. S. 592, a case
involving the Full Faith and Credit Clause, we held that a
foreign State is properly treated as a private entity with
respect to state-issued bonds that have traveled outside its
borders. See id., at 595 (beyond its borders, a debtor State
“is compelled to go into the market as a borrower, subject to
the same disabilities in this particular as individuals,” and
has none “of the attributes of sovereignty as to the debt it
owes”). Viewed through this lens, the Kentucky tax scheme
parallels the ordinance upheld in United Haulers: it “bene
fit[s] a clearly public [issuer, that is, Kentucky], while treat
ing all private [issuers] exactly the same.” 550 U. S., at 342.
There is no forbidden discrimination because Kentucky, as a
public entity, does not have to treat itself as being “substan
tially similar” to the other bond issuers in the market.13
Thus, United Haulers provides a firm basis for reversal.
Just like the ordinances upheld there, Kentucky’s tax exemp
tion favors a traditional government function without any
differential treatment favoring local entities over substan
tially similar out-of-state interests. This type of law does
“not ‘discriminate against interstate commerce’ for purposes
of the dormant Commerce Clause.” Id., at 345.
B
This case, like United Haulers, may also be seen under the
broader rubric of the market participation doctrine, although
the Davises say that market participant cases are inapposite
here. In their view, we may not characterize state action
under the Kentucky statutes as market activity for public
purposes, because this would ignore a fact absent in United
13 Contrary to the dissent, see post, at 371–372, we do not suggest that
the only market at issue here is a discrete market for Kentucky bonds.
In fact, we recognize that the relevant market can be conceived more
broadly. See infra, at 350–351. Our point goes not to the contours of the
market, but to the proper characterization of the various entities acting in
the market.

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Haulers but central here: this is a case about differential
taxation, and a difference that amounts to a heavier tax bur
den on interstate activity is forbidden, see, e. g., Camps New
found/Owatonna, Inc. v. Town of Harrison, 520 U. S. 564
(1997) (invalidating statute exempting charities from real es
tate and personal property taxes unless conducted or oper
ated principally for the benefit of out-of-state residents);
Fulton Corp., 516 U. S. 325 (striking down tax on corporate
stock held by state residents, where rate of tax was inversely
proportional to the corporation’s exposure to the State’s in
come tax); Bacchus Imports, Ltd. v. Dias, 468 U. S. 263
(1984) (holding excise tax on sale of liquor at wholesale un
constitutional because it exempted some locally produced al
coholic beverages).
The Davises make a fair point to the extent that they
argue that Kentucky acts in two roles at once, issuing bonds
and setting taxes, and if looked at as a taxing authority it
seems to invite dormant Commerce Clause scrutiny of its
regulatory activity, see Walling v. Michigan, 116 U. S. 446,
455 (1886) (“A discriminating tax imposed by a State operat
ing to the disadvantage of the products of other States when
introduced into the first mentioned State, is, in effect, a regu
lation in restraint of commerce among the States, and as such
is a usurpation of the power conferred by the Constitution
upon the Congress”); see also Camps Newfound, supra, at
578 (“[I]t is clear that discriminatory burdens on interstate
commerce imposed by regulation or taxation may . . . violate
the Commerce Clause”); Tracy, supra, at 287 (“The negative
or dormant implication of the Commerce Clause prohibits
state taxation . . . that discriminates against or unduly bur
dens interstate commerce”).
But there is no ignoring the fact that imposing the differ
ential tax scheme makes sense only because Kentucky is also
a bond issuer. The Commonwealth has entered the market
for debt securities, just as Maryland entered the market for
automobile hulks, see Alexandria Scrap, 426 U. S., at 806,

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and South Dakota entered the cement market, see Reeves,
447 U. S., at 440. It simply blinks this reality to disaggre
gate the Commonwealth’s two roles and pretend that in ex
empting the income from its securities, Kentucky is inde
pendently regulating or regulating in the garden variety
way that has made a State vulnerable to the dormant Com
merce Clause. States that regulated the price of milk, see,
e. g., West Lynn Creamery, Inc. v. Healy, 512 U. S. 186 (1994);
Baldwin v. G. A. F. Seelig, Inc., 294 U. S. 511 (1935), did not
keep herds of cows or compete against dairy producers for
the dollars of milk drinkers. But when Kentucky exempts
its bond interest, it is competing in the market for limited
investment dollars, alongside private bond issuers and its
sister States, and its tax structure is one of the tools of
competition.14
The failure to appreciate that regulation by taxation here
goes hand in hand with market participation by selling bonds
allows the Davises to advocate the error of focusing exclu
sively on the Commonwealth as regulator and ignoring the
Commonwealth as bondseller, see Brief for Respondents 36–
39, just as the state court did in saying that “ ‘when a state
chooses to tax its citizens, it is acting as a market regula
tor[,]’ not as a market participant.” 197 S. W. 3d, at 564
(quoting Shaper, 97 Ohio App. 3d, at 764, 647 N. E. 2d, at
552).15 To indulge in this single vision, however, would re
quire overruling most, if not all, of the cases on point decided
since Alexandria Scrap.
White, for example, also scrutinized a government acting
in dual roles. The mayor of Boston promulgated an execu
tive order that bore the hallmarks of regulation: it applied
to every construction project funded wholly or partially by
city funds (or funds administered by the city), and it imposed
14 The dissent overlooks this discussion when it claims that we contend
Kentucky does not compete with other municipal bond issuers. See
post, at 368.
15 The dissent does the same. See post, at 367, 374–375.

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general restrictions on the hiring practices of private con
tractors, mandating that 50% of their work forces be bona
fide Boston residents and setting thresholds for minorities
(25%) and women (10%) as well. See 460 U. S., at 205, n. 1;
see also id., at 218–219 (Blackmun, J., concurring in part and
dissenting in part) (“The executive order in this case . . . is a
direct attempt to govern private economic relationships. . . .
[It] is the essence of regulation”). At the same time, the
city took part in the market by “expend[ing] . . . its own
funds in entering into construction contracts for public proj
ects.” Id., at 214–215 (opinion of the Court). After speak
ing of “ ‘[t]he basic distinction . . . between States as market
participants and States as market regulators,’ ” id., at 207
(quoting Reeves, supra, at 436–437), White did not dissect
Boston’s conduct and ignore the former. Instead, the Court
treated the regulatory activity in favor of local and minority
labor as terms or conditions of the government’s efforts in
its market role, which was treated as dispositive.
Similarly, in Alexandria Scrap, Maryland employed the
tools of regulation to invigorate its participation in the mar
ket for automobile hulks. The specific controversy there
was over documentation requirements included in a “compre
hensive statute designed to speed up the scrap cycle.” 426
U. S., at 796. Superficially, the scheme was regulatory in
nature; but the Court’s decision was premised on its view
that, in practical terms, Maryland had not only regulated but
had also “entered into the market itself to bid up [the] price”
of automobile hulks. See id., at 806.
United Haulers, though not placed under the market par
ticipant umbrella, may be seen as another example. Not
only did the public authority acting in that case process
trash, but its governmental superiors forbade trash haulers
to deal with any other processors. This latter fact did not
determine the outcome, however; the dispositive fact was the
government’s own activity in processing trash. We upheld
the government’s decision to shut down the old market for

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trash processing only because it created a new one all by
itself, and thereby became a participant in a market with
just one supplier of a necessary service. If instead the gov
ernment had created a monopoly in favor of a private hauler,
we would have struck down the law just as we did in C & A
Carbone, Inc. v. Clarkstown, 511 U. S. 383 (1994). United
Haulers accordingly turned on our decision to give para
mount consideration to the public function in actively dealing
in the trash market; if the Davises had their way, United
Haulers would be overruled and the market participation
doctrine would describe a null set (or maybe a set of one, see
Reeves, supra).
In each of these cases the commercial activities by the gov
ernments and their regulatory efforts complemented each
other in some way, and in each of them the fact of tying the
regulation to the public object of the foray into the market
was understood to give the regulation a civic objective dif
ferent from the discrimination traditionally held to be unlaw
ful: in the paradigm of unconstitutional discrimination the
law chills interstate activity by creating a commercial advan
tage for goods or services marketed by local private actors,
not by governments and those they employ to fulfill their
civic objectives, see, e. g., Fulton Corp., 516 U. S. 325 (higher
tax on the stock of corporations with little or no presence in
the State); New Energy Co. of Ind., 486 U. S. 269 (tax credit
to sellers of ethanol available only for ethanol produced in
the State); Bacchus Imports, Ltd., 468 U. S. 263 (tax exemp
tion that applied only to sales of certain locally produced
liquors); Lewis v. BT Investment Managers, Inc., 447 U. S.
27 (1980) (prohibition on out-of-state banks owning in-state
businesses that provided investment advisory services); Bos
ton Stock Exchange v. State Tax Comm’n, 429 U. S. 318
(1977) (higher tax on sale of securities by nonresidents if
the securities were sold on an out-of-state, not an in-state,
exchange). In sum, our cases on market regulation without
market participation prescribe standard dormant Commerce

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348 DEPARTMENT OF REVENUE OF KY. v. DAVIS
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Clause analysis; our cases on market participation joined
with regulation (the usual situation) prescribe exceptional
treatment for this direct governmental activity in commer
cial markets for the public’s benefit.16
The Kentucky tax scheme falls outside the forbidden para
digm because the Commonwealth’s direct participation fa
vors, not local private entrepreneurs, but the Commonwealth
and local governments. The Commonwealth enacted its tax
code with an eye toward making some or all of its bonds
more marketable. When it issues them for sale in the bond
market, it relies on that tax code, and seller and purchaser
treat the bonds and the tax rate as joined just as intimately,
say, as the work force requirements and city construction
contracts were in Boston. Issuing bonds must therefore
have the same significance under the dormant Commerce
Clause as government trash processing, junk car disposal,
or construction; and United Haulers, Alexandria Scrap, and
White can be followed only by rejecting the Davises’ argu
ment that Kentucky’s regulatory activity should be viewed
in isolation as Commerce Clause discrimination.17
16 Significantly, our market participant cases are not limited to cases
where the government supplies a uniquely public product. This much is
manifest from Reeves, Inc. v. Stake, 447 U. S. 429 (1980). There is nothing
remarkable or inherently governmental about the cement South Dakota
produced, and yet we recognized that the State may engage in clear dis
crimination against out-of-state buyers that regular dormant Commerce
Clause analysis would undoubtedly have held unconstitutional.
17 The dissent criticizes this analysis on the basis of our statement in
Camps Newfound/Owatonna, Inc. v. Town of Harrison, 520 U. S. 564, 593
(1997), that “[a] tax exemption is not the sort of direct state involvement
in the market that falls within the market-participation doctrine.” See
post, at 374–375. This both misses the point and leaves the language from
Camps Newfound shorn of context. In Camps Newfound, the tax exemp
tion was unaccompanied by any market activity by the State; it favored
only private charitable institutions. We correctly rejected the argument
that a tax exemption without more constitutes market participation. But
we had no occasion to consider the scheme here, where a State employs a

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C
A look at the specific markets in which the exemption’s
effects are felt both confirms the conclusion that no tradition
ally forbidden discrimination is underway and points to the
distinctive character of the tax policy. The market as most
broadly conceived is one of issuers and holders of all fixed
income securities, whatever their source or ultimate destina
tion. In this interstate market, Kentucky treats income
from municipal bonds of other States just like income from
bonds privately issued in Kentucky or elsewhere; no prefer
ence is given to any local issuer, and none to any local holder,
beyond what is entailed in the preference Kentucky grants
itself when it engages in activities serving public objectives.
A more specialized market can be understood as commerce
solely in federally tax-exempt municipal bonds, much of it
tax exemption to facilitate its own participation in the market. As noted
before, one of the dissent’s critical premises is the disaggregation of bond
issuance and tax treatment, see post, at 367, 374; that strikes us as a denial
of economic reality.
The dissent also suggests that our reasoning conflicts with South-
Central Timber Development, Inc. v. Wunnicke, 467 U. S. 82 (1984), see
post, at 375, but there is no conflict. In South-Central, Alaska condi
tioned the sale of state timber to private purchasers by requiring that the
timber be processed within the State prior to export, and a plurality
struck down the condition under the Commerce Clause. The case turned
on the plurality’s conclusion that the processing requirement constituted
a “restrictio[n] on dispositions subsequent to the goods coming to rest in
private hands.” 467 U. S., at 98; see id., at 95 (“Under the Alaska require
ment, . . . the choice is made for [the purchaser]: if he buys timber from the
State he is not free to take the timber out of state prior to processing”).
Kentucky imposes no such restrictions on the disposition of Kentucky
bonds; bondholders are free to sell the bonds to whomever they please.
Thus, the type of “downstream regulation” that South-Central found ob
jectionable is simply not present here. Id., at 99. We note also that
South-Central expressly applied “more rigorous” Commerce Clause scru
tiny because the case involved “foreign commerce” and restrictions on the
resale of “a natural resource.” Id., at 100, 96. Neither of those elements
appears here.

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conducted through interstate municipal bond funds.18 Here,
of course, the distinction between the taxing State’s bonds
and their holders and issuers and holders of out-of-state
counterparts is at its most stark. But what is remarkable
about the issuers in this and the broader interstate market
is that nearly every taxing State believes its public interests
are served by the same tax-and-exemption feature, which is
supported in this Court by every one of the States (with or
without an income tax) despite the ranges of relative wealth
and tax rates among them. See Brief for 49 States as Amici
Curiae. These facts suggest that no State perceives any
local advantage or disadvantage beyond the permissible ones
open to a government and to those who deal with it when
that government itself enters the market. See supra, at
344–348.
An equally significant perception emerges from examining
the third type of market for municipal bonds: the one for
bonds within the State of issue, a large proportion of which
market in each State is managed by one or more single-state
funds. By definition, there is no discrimination against in
terstate activity within the market itself, but one of its fea
tures reveals an important benefit of intrastate bond mar
kets as they operate through these funds. The intrastate
18 See National Federation Brief 11 (“In 2006, tax-exempt mutual funds
held approximately $365 billion in long-term [municipal] bonds, of which
approximately $155 billion were held in 481 single-state funds and approxi
mately $210 billion in 230 national funds . . . [and, as of March 2007,] ap
proximately $254 billion [in short-term municipal bonds] were held in na
tional tax-exempt money market funds and approximately $125 billion in
single state tax-exempt money market funds” (citing Investment Company
Institute, 2007 Investment Company Fact Book 96, 98; Lipper Analytical
Services, Tax-Exempt Fixed Income Fund Performance Analysis, 1st
Quarter 2007 Report)); National Federation Brief 12 (“[A]pproximately
58% of . . . long-term municipal bonds [owned by mutual funds] and approx
imately 67% of . . . short-term municipal securities were purchased without
regard to a match between the state of the bond issuer and the state of
the fund’s shareholders”).

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funds absorb securities issued by smaller or lesser known
municipalities that the interstate markets tend to ignore.
See National Federation Brief 15 (compared with single
state funds, “[n]ational mutual funds . . . are less likely to
dedicate the time necessary to evaluate a small, obscure or
infrequent municipal bond issuer or to purchase bonds issued
by such public entities”); id., at 19 (“[N]ational mutual funds
place a higher premium on the liquidity of their holdings than
do single state funds, which are willing to purchase less liq
uid municipal bonds of smaller and less familiar issuers be
cause of the state tax advantage and the fund’s mandate to
purchase bonds issued within a specific state”).
There is little doubt that many single-state funds would
disappear if the current differential tax schemes were upset.
See id., at 18 (“[O]ne predictable impact of the elimination
of tax incentives for the purchase of municipal bonds issued
in a specific state would be the disappearance, through con
solidation into national mutual funds, of single state mutual
funds”); ibid. (“Although a handful of single state funds
might continue to exist for a small number of states (such as
Florida) with high populations that have a high affinity for
local bond issuers, the current state tax system is the raison
d’etre for virtually all single state funds, and they would
cease to be financially viable in the absence of a tax advan
tage that outweighed their relative lack of diversification
vis-a` -vis national funds and their reduced asset base”); ac
cord, Brief for Respondents 29 (the States’ tax exemptions
“have fostered the growth of funds that hold only the munici
pal bonds of a single state,” which “[a]s compared [with] na
tional tax-exempt bonds funds . . . tend to be higher risk and
higher cost”); 11 Kiplinger’s Retirement Report, Win With
Home-State Muni Bond Funds, p. 2 (Dec. 2004) (noting that
in States without a differential taxation scheme, “there’s lit
tle incentive to create [single-state] muni bond funds”).
Nor is there any suggestion that the interstate markets
would discover some new reason to welcome the weaker mu

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352 DEPARTMENT OF REVENUE OF KY. v. DAVIS
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nicipal issues that would lose their local market homes after
a victory for the Davises here. See National Federation
Brief 18, 19 (“The main adverse impact of the disappearance
of single state funds . . . would be felt by small municipal
issuers” because they “would stand to lose much of the intra
state market for the bonds that has developed under the cur
rently prevailing state tax system without gaining much of
an interstate market from its elimination”). Financing for
long-term municipal improvements would thus change radi
cally if the differential tax feature disappeared.19
This probable indispensability of the current scheme to
maintaining single-state markets serving smaller municipal
borrowers not only underscores how far the States’ objec
tives probably lie from the forbidden protectionism for local
business; it also tends to explain why the States are so com
mitted to a taxing practice that much scholarship says often
produces a net burden of tax revenues lost over interest ex
pense saved. See, e. g., Brief for Alan D. Viard et al. as
Amici Curiae 19 (“[S]tates routinely fail to recoup the cost
of the tax subsidy in the form of lower financing rates” (citing
Chalmers, Default Risk Cannot Explain the Muni Puzzle: Ev
idence From Municipal Bonds That Are Secured by U. S.
Treasury Obligations, 11 Rev. Financial Studies 281, 282–
283 (1998))).
In sum, the differential tax scheme is critical to the opera
tion of an identifiable segment of the municipal financial mar
ket as it currently functions, and this fact alone demonstrates
that the unanimous desire of the States to preserve the tax
19 The Davises themselves, in their opposition to the petition, explain
that if the tax exemptions are removed, “states will open their investment
sales to the entire national market for debt instruments.” Brief in Oppo
sition 10–11. As a result, the Davises say, “[o]nce states compete in the
financial markets without the protective benefit of coercive tax schemes,
they will have to be more selective in what projects they choose to
fund. . . . [T]he market will provide incentives for governments to be more
careful in selecting and funding projects through bond sales.” Id., at 11,
n. 5.

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353 Cite as: 553 U. S. 328 (2008)
Opinion of the Court
feature is a far cry from the private protectionism that has
driven the development of the dormant Commerce Clause.
It is also fatal to the Davises’ backup argument that this
case should be remanded for analysis under the rule in Pike,
397 U. S. 137.
IV
Concluding that a state law does not amount to forbidden
discrimination against interstate commerce is not the death
knell of all dormant Commerce Clause challenges, for we
generally leave the courtroom door open to plaintiffs invok
ing the rule in Pike, that even nondiscriminatory burdens on
commerce may be struck down on a showing that those bur
dens clearly outweigh the benefits of a state or local practice.
See id., at 142. The Kentucky courts made no Pike enquiry,
and the Davises ask us to remand for one now, see Brief
for Respondents 43.
The Davises’ request for Pike balancing assumes an an
swer to an open question: whether Pike even applies to a
case of this sort. United Haulers included a Pike analysis,
see 550 U. S., at 346–347 (plurality opinion), but our cases
applying the market participant exception have not, see, e. g.,
White, 460 U. S. 204; Alexandria Scrap, 426 U. S. 794. We
need not decide this question today, however, for Kentucky
has not argued that Pike is irrelevant, see Reply Brief for
Petitioners 2, n. 1, and even on the assumption that a Pike
examination might generally be in order in this type of case,
the current record and scholarly material convince us that
the Judicial Branch is not institutionally suited to draw reli
able conclusions of the kind that would be necessary for the
Davises to satisfy a Pike burden in this particular case.
The institutional difficulty is manifest in the very train
of disadvantages that the Davises’ counsel attributes to the
current differential tax scheme:
“First, it harms out-of-state issuers (i. e., other States
and their subdivisions) by blocking their access to in

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354 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Opinion of the Court
vestment dollars in Kentucky. Second, it similarly
harms out-of-state private sellers (e. g., underwriters,
individuals, and investment funds) who wish to sell their
bonds in Kentucky. Third, it harms the national munic
ipal bond market and its participants by distorting and
impeding the free flow of capital. Fourth, it harms
Kentucky investors by promoting risky, high-cost in
vestment vehicles. Fifth, it harms the States by com
pelling them to enact competing discriminatory laws
that decrease their net revenues.” Brief for Respond
ents 9.
Even if each of these drawbacks does to some degree eventu
ate from the system, it must be apparent to anyone that
weighing or quantifying them for a cost-benefit analysis
would be a very subtle exercise. It is striking, after all, that
most of the harms allegedly flowing directly or indirectly
to Kentucky’s sister States and their citizens have failed to
dissuade even a single State from supporting the current
system; every one of them, including States with no income
tax, have lined up with Kentucky in this case.
The prospect for reliable Pike comparison dims even fur
ther when we turn to the benign function of the current sys
tem flagged a moment ago. Is any court in a position to
evaluate the advantage of the current market for bonds is
sued by the smaller municipalities, the ones with no ready
access to any other bond market than single-state funds?
Consider that any attempt to place a definite value on this
feature of the existing system would have to confront the
what-if questions. If termination of the differential tax
scheme jeopardized or eliminated most single-state funds (as
the cited authorities predict), would some new source of capi
tal take their place? Would the interstate markets accom
modate the small issuers (as no cited authorities predict), or
would the financing in question be replaced by current local
taxation for long-term projects (unlikely, considering that

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355 Cite as: 553 U. S. 328 (2008)
Opinion of the Court
financially weaker borrowers are involved), or would state
governments assume responsibility through their own bonds
or by state taxation? Or would capital to some degree sim
ply dry up, eliminating a class of municipal improvements? 20
And if some new source or sources of capital became avail
able for these improvements in a given State, how likely is
it that the new scheme would produce measurable net bene
fits to other States seeking capital, and how perceptibly
would it produce a freer flow of funds? Money spent up
front on increased local or state taxation is no more available
for out-of-state investment than money invested in local
bonds; sinking funds would be obviated, but what would the
effect be on interstate capital flows?
What is most significant about these cost-benefit questions
is not even the difficulty of answering them or the inevitable
uncertainty of the predictions that might be made in trying
to come up with answers, but the unsuitability of the judicial
process and judicial forums for making whatever predictions
and reaching whatever answers are possible at all. See
Tracy, 519 U. S., at 308 (“[T]he Court is institutionally un
suited to gather the facts upon which economic predictions
can be made, and professionally untrained to make them”);
cf. Fulton Corp., 516 U. S., at 342 (“ ‘[C]ourts as institutions
are poorly equipped to evaluate with precision the relative
burdens of various methods of taxation. The complexities
of factual economic proof always present a certain potential
for error, and courts have little familiarity with the process
of evaluating the relative economic burden of taxes’ ” (quot
20 History bears out the concern that poorer places may have a harder
time taking on at least some types of local investments. See Goldin &
Katz, The Shaping of Higher Education: The Formative Years in the
United States, 1890 to 1940, 13 J. Econ. Perspectives 37, 50–55 (Winter
1999) (per capita spending on public universities depended on local wealth);
Goldin, America’s Graduation From High School: The Evolution and
Spread of Secondary Schooling in the Twentieth Century, 58 J. Econ. Hist.
345, 369–372 (1998) (likewise for public high schools).

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356 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Opinion of the Court
ing Minneapolis Star & Tribune Co. v. Minnesota Comm’r
of Revenue, 460 U. S. 575, 589–590 (1983))).
While it is not our business to suggest that the current
system be reconsidered, if it is to be placed in question a
congressional forum has two advantages. Congress has
some hope of acquiring more complete information than ad
versary trials may produce, and an elected legislature is the
preferable institution for incurring the economic risks of any
alteration in the way things have traditionally been done.
And risk is the essence of what the Davises are urging here.
It would miss the mark to think that the Kentucky courts,
and ultimately this Court, are being invited merely to tinker
with details of a tax scheme; we are being asked to apply a
federal rule to throw out the system of financing municipal
improvements throughout most of the United States, and the
rule in Pike was never intended to authorize a court to ex
pose the States to the uncertainties of the economic experi
mentation the Davises request.
* * *
The dissent rightly praises the virtues of the free market,
and it warns that our decision to uphold Kentucky’s tax
scheme will result in untoward consequences for that mar
ket. See, e. g., post, at 375–376. But the warning is alarm
ism; going back to 1919 the state regimes of differential bond
taxation have been elements of the national commerce with
out wilting the Commerce Clause. The threat would come,
instead, from the dissent’s approach, which to a certainty
would upset the market in bonds and the settled expecta
tions of their issuers based on the experience of nearly a
century.
We have been here before. Our predecessors on this
Court responded to an earlier invitation to the adventurism
of overturning a traditional local taxing practice. Justice
Holmes answered that “the mode of taxation is of long stand
ing, and upon questions of constitutional law the long settled

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Cite as: 553 U. S. 328 (2008) 357
Stevens, J., concurring
habits of the community play a part . . . . [T]he fact that
the system has been in force for a very long time is of itself
a strong reason . . . for leaving any improvement that may
be desired to the legislature.” Paddell v. City of New York,
211 U. S. 446, 448 (1908).21
The judgment of the Court of Appeals of Kentucky is re
versed, and the case is remanded for further proceedings not
inconsistent with this opinion.
It is so ordered.
Justice Stevens, concurring.
Having dissented in both Reeves, Inc. v. Stake, 447 U. S.
429 (1980), and United Haulers Assn., Inc. v. Oneida-
Herkimer Solid Waste Management Authority, 550 U. S. 330
(2007), it seems appropriate to state briefly why I would join
the Court’s opinion even if those cases had been decided dif
ferently. Reeves and United Haulers involved state partici
pation in commercial markets—the market for cement in
Reeves and the market for waste disposal in United Haulers.
The state entities in those cases imposed burdens on the pri
vate market for commercial goods and services. In this case
Kentucky and its local governmental units engage in no pri
vate trade or business; they are merely borrowers of funds
needed to finance public improvements.
Putting to one side cases in which a State may create a
“market that did not previously exist,” see Hughes v. Alex
andria Scrap Corp., 426 U. S. 794, 815 (1976) (Stevens, J.,
concurring), I agree with Justice Powell’s view that when a
“State enters the private market and operates a commercial
21 The dissent thinks the need to preserve existing financing practices is
the true “controlling rationale” of our holding, post, at 375, but not ac
knowledged as such. As Justice Holmes’s opinion shows, practical conse
quences have always been relevant in deciding the constitutionality of
local tax laws. The practical considerations discussed here support the
traditional distinction between permissible public preferences and the for
bidden discriminations for the benefit of local private interests.

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358 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Stevens, J., concurring
enterprise for the advantage of its private citizens, it may
not evade the constitutional policy against economic Balkan
ization.” Reeves, 447 U. S., at 449–450 (dissenting opinion).
On the other hand, if a State merely borrows money “to pay
for spending on transportation, public safety, education, utili
ties, and environmental protection,” ante, at 334, it does not
“operat[e] a commercial enterprise” for purposes of the dor
mant Commerce Clause. As the majority of this Court
stressed in C & A Carbone, Inc. v. Clarkstown, 511 U. S. 383
(1994)—and Justice Alito reiterated in his dissent in
United Haulers—instead of enacting “flow control” waste
disposal ordinances, the local governments would have been
“free, of course, to ‘subsidize the[ir] [program] through
general taxes or municipal bonds. But having elected
to use the open market to earn revenues for’ their waste
management program, [they] ‘may not employ discrimi
natory regulation to give that [program] an advantage
over rival businesses from out of State.’ ” 550 U. S., at
368 (quoting Carbone, 511 U. S., at 394; citation omitted).
A State’s reliance on “general taxes or municipal bonds” to
finance public projects does not merit the same Commerce
Clause scrutiny as “operating a fee-for-service business en
terprise in an area in which there is an established interstate
market.” 550 U. S., at 362 (Alito, J., dissenting). I am not
persuaded that the Commerce Clause analysis should change
just because Kentucky chooses to make the interest it pays
on its own municipal bonds, which is already tax exempt
under federal law, also tax exempt under Kentucky law.
The citizens of Kentucky provide the natural market for
the purchase of Kentucky’s bonds because they are also the
beneficiaries of the programs being financed. Moreover, it
is their tax payments that will enable Kentucky to pay the
interest on the bonds and to discharge its indebtedness.
The tax exemption for Kentucky citizens enhances the mar
ketability of Kentucky bonds in the Kentucky market, moti

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359 Cite as: 553 U. S. 328 (2008)
Scalia, J., concurring in part
vating local support for local public improvements. Instead
of issuing bonds, Kentucky could have borrowed funds from
a Kentucky bank or issued notes to a syndicate of Kentucky
lenders without implicating the Commerce Clause, even
though such fundraising would preclude an equal amount of
money in Kentucky from entering the interstate market for
bonds.* Free tickets to the Kentucky Derby for purchasers
of the bonds would have a comparable, though presumably
lesser, effect. In my judgment state action that motivates
the State’s taxpayers to lend money to the State is simply
not the sort of “burden” on interstate commerce that is im
plicated by our dormant Commerce Clause jurisprudence.
Chief Justice Roberts, concurring in part.
I join all but Part III–B of the opinion of the Court. In
my view, the case is readily resolved by last Term’s decision
in United Haulers Assn., Inc. v. Oneida-Herkimer Solid
Waste Management Authority, 550 U. S. 330 (2007). A ma
jority of the Court shares this view. That being the case,
I see no need to proceed to the alternative analysis in Part
III–B.
Justice Scalia, concurring in part.
I join all but Part III–B and Part IV of the opinion of the
Court. I will apply our negative Commerce Clause doctrine
only when stare decisis compels me to do so. In my view it
is “an unjustified judicial invention, not to be expanded be
yond its existing domain.” General Motors Corp. v. Tracy,
519 U. S. 278, 312 (1997) (Scalia, J., concurring). Stare deci
sis does not compel invalidation of Kentucky’s statute. As
the Court explains, it would be no small leap from invalidat
ing state discrimination in favor of private entities to invali
*Indeed, Kentucky could have just increased taxes. By issuing bonds
in lieu of increasing taxes, Kentucky has enlarged the interstate market
for securities, as well as increased the money available to Kentucky citi
zens to partake in this market.

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360 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Scalia, J., concurring in part
dating state discrimination in favor of the State’s own subdi
visions performing a traditional governmental function. To
apply the negative Commerce Clause in this area would
broaden the doctrine “ ‘beyond its existing scope, and intrude
on a regulatory sphere traditionally occupied by . . . the
States.’ ” United Haulers Assn., Inc. v. Oneida-Herkimer
Solid Waste Management Authority, 550 U. S. 330, 348
(2007) (Scalia, J., concurring in part) (omission in original).
That is enough for me.
I do not join Part III–B of the opinion of the Court because
I think Part III–A adequately resolves the issue. I also do
not join Part IV, which describes the question whether so
called Pike balancing applies to laws like this as an “open”
one. Ante, at 353; see Pike v. Bruce Church, Inc., 397 U. S.
137 (1970). The Court declines to engage in Pike balancing
here because courts are ill suited to determining whether or
not this law imposes burdens on interstate commerce that
clearly outweigh the law’s local benefits, and the “balancing”
should therefore be left to Congress. See ante, at 353–356.
The problem is that courts are less well suited than Congress
to perform this kind of balancing in every case. The bur
dens and the benefits are always incommensurate, and can
not be placed on the opposite balances of a scale without
assigning a policy-based weight to each of them. It is a mat
ter not of weighing apples against apples, but of deciding
whether three apples are better than six tangerines. Here,
on one end of the scale (the burden side) there rests a certain
degree of suppression of interstate competition in borrowing;
and on the other (the benefits side) a certain degree of facili
tation of municipal borrowing. Of course you cannot decide
which interest “outweighs” the other without deciding which
interest is more important to you. And that will always be
the case. I would abandon the Pike-balancing enterprise al
together and leave these quintessentially legislative judg
ments with the branch to which the Constitution assigns
them. See Bendix Autolite Corp. v. Midwesco Enterprises,

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361 Cite as: 553 U. S. 328 (2008)
Thomas, J., concurring in judgment
Inc., 486 U. S. 888, 897–898 (1988) (Scalia, J., concurring in
judgment).
Justice Thomas, concurring in the judgment.
I agree with the Court that Kentucky’s differential tax
scheme is constitutional. But rather than apply a body of
doctrine that “has no basis in the Constitution and has
proved unworkable in practice,” I would entirely “discard
the Court’s negative Commerce Clause jurisprudence.”
United Haulers Assn., Inc. v. Oneida-Herkimer Solid Waste
Management Authority, 550 U. S. 330, 349 (2007) (Thomas,
J., concurring in judgment). See also American Trucking
Assns., Inc. v. Michigan Pub. Serv. Comm’n, 545 U. S. 429,
439 (2005) (same) (“ ‘ “[T]he negative Commerce Clause has
no basis in the text of the Constitution, makes little sense,
and has proved virtually unworkable in application” ’ ” (quot
ing Hillside Dairy Inc. v. Lyons, 539 U. S. 59, 68 (2003)
(Thomas, J., concurring in part and dissenting in part), in
turn quoting Camps Newfound/Owatonna, Inc. v. Town of
Harrison, 520 U. S. 564, 610 (1997) (Thomas, J., dissenting))).
Because Congress’ authority to regulate commerce “among
the several States,” U. S. Const., Art. I, § 8, cl. 3, necessarily
includes the power “to prevent state regulation of interstate
commerce,” United Haulers, supra, at 349 (Thomas, J., con
curring in judgment), the text of the Constitution makes
clear that the Legislature—not the Judiciary—bears the re
sponsibility of curbing what it perceives as state regulatory
burdens on interstate commerce.
As the Court acknowledges, Kentucky’s differential tax
scheme is far from unique. Ante, at 331–332. For nearly
a century, some States have treated income derived from
out-of-state bonds differently than that derived from their
in-state counterparts. Ibid. At present, the vast majority
of the States do so. Ante, at 335. The practice is thus both
longstanding and widespread, yet Congress has refrained
from pre-empting it. Cf. New Jersey Realty Title Ins. Co.

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362 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
v. Division of Tax Appeals of N. J., 338 U. S. 665, 671 (1950)
(holding that a federal statute exempting interest-bearing
obligations of the United States from state and local taxa
tion pre-empted a conflicting state statute). In the “face of
[this] congressional silence,” United Haulers, supra, at 352
(Thomas, J., concurring in judgment), we have no authority
to invalidate Kentucky’s differential tax scheme. I would
reverse the judgment below on that basis.
Justice Kennedy, with whom Justice Alito joins,
dissenting.
Eighteenth-century thinkers, even those most prescient,
could not foresee our technological and economic interde
pendence. Yet they understood its foundation. Free trade
in the United States, unobstructed by state and local barri
ers, was indispensable if we were to unite to ensure the lib
erty and progress of the whole Nation and its people. This
was the vision, and a primary objective, of the Framers of
the Constitution. History, as we know, vindicates their
judgment. The national, free market within our borders
has been a singular force in shaping the consciousness and
creating the reality that we are one in purpose and destiny.
The Commerce Clause doctrine that emerged from the deci
sions of this Court has been appropriate and necessary to
implement the Constitution’s purpose and design.
These general observations are offered at the outset to
underscore the imprudent risk the Court now creates by
misinterpreting our precedents to decide this case. True,
the majority opinion, wrong as it is, will not threaten the
whole economy or national unity on these facts alone. The
explicit, local discrimination the Court ratifies today likely
will result in extra, though manageable, accommodation
costs and can be welcomed by existing interests ready to
profit from it. This market perhaps can absorb the costs of
discrimination; our jurisprudence, unless the decision stands
alone as an anomaly, cannot.

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Kennedy, J., dissenting
Reactive institutions and adjusting forces—for instance
mutual funds for state and municipal bonds issued within a
single State—already are in place in response to the local
protectionist laws here at issue and now in vogue. These
mechanisms may allow the market, though necessarily dis
torted by deviation from essential constitutional principles,
to continue to cope in a more or less efficient manner; and
the damage likely will be limited to the discrete, and now
distorted, market for state and municipal bonds. Many
economists likely will find it unfortunate, and inefficient, that
a specialized business has emerged to profit from a departure
from constitutional principles. Even if today’s decision is
welcomed by those who profit from the discrimination, the
system as a whole would benefit from a return to a market
with proper form, freed from artificial restraints. It does
seem necessary, however, to point out the systemic conse
quences of today’s decision—if only to confine it and to dis
courage new experiments with local laws that discriminate
against interstate commerce and trade.
The incorrect result the majority reaches; its treatment
of the Commerce Clause cases in which our predecessors
reached a delicate, sensible implementation of the Framers’
original purpose; and the unsatisfactory, brief, circular rea
soning contained in the part of the opinion that commands a
majority of the Court are all inconsistent with our prece
dents and require this respectful dissent.
Protectionist trade laws and policies, pursued to favor local
interests within a larger trading area, invite prompt retalia
tory response. This dynamic was one the Framers under
stood in theory and saw in fact. See, e. g., West Lynn
Creamery, Inc. v. Healy, 512 U. S. 186, 193, n. 9 (1994).
Under the Articles of Confederation the States enacted pro
tectionist laws. It proved difficult and costly, even in terms
of political energies, to remove trade barriers by negotiated
agreements; and the few resulting compacts seemed destined
to favor the more powerful States. The immediate prospect

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364 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
of escalating trade barriers was real, and a national power
to regulate national trade and remove local barriers soon
was deemed urgent. Open markets and the elimination of
trade barriers were the very concerns that led to the Annap
olis Convention of 1786. See, e. g., E. Morgan, The Birth of
the Republic, 1763–89, p. 129 (1956). The frustrations of
that meeting built a strong consensus for the necessity of a
larger compact and led to the call for the Philadelphia Con
vention. See, e. g., 1 S. Morison, H. Commager, & W. Leuch
tenburg, The Growth of the American Republic 244 (rev. 6th
ed. 1969). The object of creating free trade throughout a
single nation, without protectionist state laws, was a domi
nant theme of the convention at Philadelphia and during
the ratification debates that followed. See, e. g., The Feder
alist No. 22, pp. 143–144 (C. Rossiter ed. 1961) (A. Hamil
ton) (“It is indeed evident, on the most superficial view,
that there is no object, either as it respects the interest
of trade or finance, that more strongly demands a federal
superintendence”).
This dissent will not repeat an earlier, brief account of
our Commerce Clause jurisprudence. See United States v.
Lopez, 514 U. S. 549, 568–583 (1995) (Kennedy, J., concur
ring). The cases from Gibbons v. Ogden, 9 Wheat. 1 (1824),
to Willson v. Black Bird Creek Marsh Co., 2 Pet. 245 (1829),
and then through Cooley v. Board of Wardens of Port of
Philadelphia ex rel. Soc. for Relief of Distressed Pilots, 12
How. 299 (1852), began the elaboration of a rule respectful of
local laws and local expertise, while preserving the theory
and fact of free trade throughout the Nation. Though an
oversimplification, it suffices here to note that our commerce
cases have invalidated two types of local barriers: laws that
impose unreasonable burdens upon interstate commerce; and
laws that discriminate against it.
The doctrine invalidating laws that impose unreasonable
burdens upon interstate commerce no doubt has been a de
terrent to local enactments attempting to regulate in ways

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Kennedy, J., dissenting
that restrict a free, national market. The corollary rule that
nondiscriminatory laws imposing a reasonable burden are
valid allows the States to exercise their powers based on
information and expertise more readily available to them
than to the National Government. The result is to eliminate
the demand and necessity for sweeping national legislation.
This line of cases has found occasional detractors. See, e. g.,
CTS Corp. v. Dynamics Corp. of America, 481 U. S. 69, 95
(1987) (Scalia, J., concurring in part and concurring in judg
ment); Southern Pacific Co. v. Arizona ex rel. Sullivan, 325
U. S. 761, 790–795 (1945) (Black, J., dissenting). The undue
burden rule, however, remains an essential safeguard against
restrictive laws that might otherwise be in force for decades
until Congress can act. Those cases were the background
for the formulation used in Pike v. Bruce Church, Inc., 397
U. S. 137 (1970), which is in essence ignored by the decision
in today’s case. See ante, at 353–356. The Court’s prece
dents discussing the undue burden principle, and Pike, need
not be addressed here, however.
That is because the law in question is invalid under a sec
ond line of precedents. These cases instruct that laws with
either the purpose or the effect of discriminating against in
terstate commerce to protect local trade are void. These
are the authorities relevant to that portion of the opinion
that commands a majority, see ante, at 341–343, and it is
necessary to address the reasons the Court advances in seek
ing to disregard them.
I
The Court defends the Kentucky law by explaining that it
serves a traditional government function and concerns the
“cardinal civic responsibilities” of protecting health, safety,
and welfare. See ante, at 342, and nn. 10–12. This is but a
reformulation of the phrase “police power,” long abandoned
as a mere tautology. It is difficult to identify any state law
that has come before us that would not meet the Court’s
description. That is why, with the unfortunate recent ex

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366 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
ception of United Haulers Assn., Inc. v. Oneida-Herkimer
Solid Waste Management Authority, 550 U. S. 330 (2007),
the Court had ceased to view the concept as saying anything
instructive. A law may contravene a provision of the Con
stitution even if enacted for a beneficial purpose.
The police power concept is simply a shorthand way of
saying that a State is empowered to enact laws in the ab
sence of constitutional constraints; but, of course, that only
restates the question. That a law has the police power
label—as all laws do—does not exempt it from Commerce
Clause analysis. The Court said this in a case striking down
an order, based upon local flood control needs, directing a
railroad to remove certain bridges and raise others that sup
ported rail lines involved in interstate commerce: “[A] State
cannot avoid the operation of [the Commerce Clause] by sim
ply invoking the convenient apologetics of the police power.”
Kansas City Southern R. Co. v. Kaw Valley Drainage Dist.,
233 U. S. 75, 79 (1914) (opinion for the Court by Holmes, J.).
The Court holds the Kentucky law is valid because bond
issuance fulfills a governmental function: raising revenue for
public projects. See ante, at 341–342. Aside from the point
that this is but an extension of the police power (“this is
a good law”) argument, the premise is wrong. The law in
question operates on those who hold the bonds and trade
them, not those who issue them. The bonds are not issued
with a covenant promising tax exemption or tax relief to the
holder. The bonds contain no such provision. The security
is issued as a formal obligation to repay. Not a word in the
terms and conditions of the securities promises favored tax
treatment for certain holders. Indeed, that could not be
done without impairing marketability. It is simply not com
mercial or investment practice to make payment obligations
turn upon either the residence of the holder or the State of
the issuer. The issuer intends to use the interstate market
for its bonds and does not encumber them with conditions

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Kennedy, J., dissenting
giving premiums or penalties depending upon the residence
of the holders.
Even if the Court were correct to say the relevant legal
framework is bond issuance, not taxation of bonds already
issued, its conclusion would be incorrect; for the discrimina
tion against out-of-state commerce still would be too plain
and prejudicial to be sustained. See, e. g., United Haulers,
supra, at 369 (Alito, J., dissenting) (“[T]o the extent [the
majority’s] holding rests on a distinction between ‘tradi
tional’ governmental functions and their nontraditional coun
terparts, it cannot be reconciled with prior precedent” (cita
tion omitted)). The insufficiency of the Court’s reasoning is
even more apparent, however, because its own premise is
incorrect. The challenged state activity is differential taxa
tion, not bond issuance. The state tax provision at issue
could be repealed tomorrow without altering or impairing a
single obligation in the bonds. It is the tax that matters;
and Kentucky gives favored tax treatment to some securities
but not others depending solely upon the State of issuance,
and it does so to disadvantage bonds from other States.
Our cases establish this rule: A State has no authority to
use its taxing power to erect local barriers to out-of-state
products or commodities. See, e. g., West Lynn, 512 U. S., at
193 (“The paradigmatic example of a law discriminating
against interstate commerce is the protective tariff or cus
toms duty, which taxes goods imported from other States,
but does not tax similar products produced in State”).
Nothing in our cases even begins to suggest this rule is in
applicable simply because the State uses a discriminatory
tax to favor its own enterprise. The tax imposed here is
an explicit discrimination against out-of-state issuances for
admitted protectionist purposes. It cannot be sustained un
less the Court disavows the discrimination principle, one of
the most important protections we have elaborated for the
Nation’s interstate markets.

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368 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
The Court has ruled that protectionist, differential taxa
tion with respect to securities sales is invalid. Boston Stock
Exchange v. State Tax Comm’n, 429 U. S. 318 (1977). In
that case the Court considered the validity of a New York
transfer tax on securities transactions. New York taxed
out-of-state sales more heavily than in-state sales. The
transactions in question were concluded on stock exchanges,
such as the Boston Stock Exchange, located outside New
York State. All conceded the transactions had sufficient
contacts with New York so it could impose a tax; the ques
tion was the validity of a higher rate on transactions closed
on exchanges located out of State. The Court’s unanimous
opinion held that the discriminatory tax, designed to favor
New York, was invalid. Id., at 328. “[I]n the process of
competition no State may discriminatorily tax the products
manufactured or the business operations performed in any
other State.” Id., at 337.
The same was true of the discriminatory tax exemption in
Bacchus Imports, Ltd. v. Dias, 468 U. S. 263 (1984), which
the Court invalidated after observing that “as long as there
is some competition between the locally produced exempt
products and nonexempt products from outside the State,
there is a discriminatory effect.” Id., at 271. This principle
refutes the majority’s contention, see ante, at 342–343, that
Kentucky’s bonds do not compete with other state or local
government bonds. The relevant inquiry is not the purpose
of a bond but whether the bond is a product that competes.
The majority cannot establish that, from an investor’s stand
point, Kentucky’s bonds do not compete with bonds from
other state or municipal governments. Indeed, that compe
tition is why the bonds need the advantages the exemptions
give them. Nothing in Bacchus suggested its holding was
dependent upon the private nature of the favored competi
tors. Instead, in rejecting the argument that discrimina
tory taxation was justified because the goal was to promote
local industry, the Court explained that the “determination

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369 Cite as: 553 U. S. 328 (2008)
Kennedy, J., dissenting
of constitutionality” does not depend upon “the benefited or
the burdened party.” 468 U. S., at 273. This reasoning
does not permit a different outcome when the State is the
“benefited party.”
The Court had little difficulty in holding invalid a discrimi
natory tax in Fulton Corp. v. Faulkner, 516 U. S. 325 (1996).
There North Carolina had devised a tax on intangibles that
employed a deduction scheme favoring those who owned
stock in local companies by, in effect, taxing at a higher rate
those who owned stock in out-of-state companies. Id., at
327–328. The Fulton scheme favored “domestic corpora
tions over their foreign competitors in raising capital among
North Carolina residents and tend[ed], at least, to discourage
domestic corporations from plying their trades in interstate
commerce.” Id., at 333. The Court held the scheme invalid
as contrary to the Commerce Clause. See id., at 347.
Differential taxation favoring local trade over interstate
commerce poses serious threats to the national free market
because the taxing power is at once so flexible and so potent.
The Court’s differential tax cases are mentioned here at the
outset because taxation is the issue; and discriminatory tax
schemes are relatively rare, if only because they resemble
tariffs—the “paradigmatic . . . law[s] discriminating against
interstate commerce,” West Lynn, 512 U. S., at 193. See
ibid. (“[T]ariffs against the products of other States are so
patently unconstitutional that our cases reveal not a single
attempt by any State to enact one. Instead, the cases are
filled with state laws that aspire to reap some of the benefits
of tariffs by other means”).
The precedents forbidding discriminatory taxes are a sub
set of a larger class of cases that invalidate other regulations
that favor local interests. These cases, too, are inconsistent
with the Court’s holding today. Bonds are commodities in
interstate commerce, and in this respect consumers are enti
tled to choose them over local products just as with milk,
Dean Milk Co. v. Madison, 340 U. S. 349 (1951); apples, Hunt

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370 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
v. Washington State Apple Advertising Comm’n, 432 U. S.
333 (1977); solid waste for landfill, Fort Gratiot Sanitary
Landfill, Inc. v. Michigan Dept. of Natural Resources, 504
U. S. 353 (1992); solid waste for transfer, C & A Carbone,
Inc. v. Clarkstown, 511 U. S. 383 (1994); out-of-state waste,
Philadelphia v. New Jersey, 437 U. S. 617 (1978); and ethanol,
New Energy Co. of Ind. v. Limbach, 486 U. S. 269 (1988) (a
differential tax case). Cases on export controls—though of
less relevance here—provide further instruction for the sim
ple proposition that the national market cannot be isolated
for protectionist or local purposes. See, e. g., Hughes v.
Oklahoma, 441 U. S. 322 (1979) (striking down a state law
prohibiting the shipment of minnows out of State); New Eng
land Power Co. v. New Hampshire, 455 U. S. 331 (1982)
(striking down a state law requiring the state utility commis
sion’s permission before a utility could convey electricity out
of State).
In that portion of the Court’s opinion that commands a
majority the main point is that validation of Kentucky’s tax
exemption follows from the Court’s opinion last Term in
United Haulers. But that overlooks the argument that was
central to the entire holding of United Haulers. There the
Court concluded the ordinance applied equally to interstate
and in-state commerce—and so it applied without differenti
ation between in-state and out-of-state commerce—because
the government had monopolized the waste processing in
dustry. See 550 U. S., at 334. Nondiscrimination, not just
state involvement, was central to the rationale. That justi
fication cannot be invoked here, for discrimination against
out-of-state bonds is the whole purpose of the law in ques
tion. Kentucky has not monopolized the bond market or the
municipal bond market. Kentucky has entered a competi
tive, nonmonopolized market and, to give its bonds a market
advantage, has taxed out-of-state municipal bonds at a
higher rate. The explicit rationale of the law is to differen
tiate between local and interstate commodities. This case

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Kennedy, J., dissenting
is not an extension of United Haulers; it is a rejection of
its principal rationale—that in monopolizing the local mar
ket, the ordinance applied equally to interstate and local
commerce.
The Court’s next argument is the police power argument,
returning to the idea that revenue-raising is important for a
State’s own essential projects. See ante, at 341–342. This
argument has two major flaws. First, it is a replay of the
circularity inherent in the police powers, health, safety, and
welfare rhetoric. It is difficult to think of any law meeting
with general approval that, assuming its validity in other
respects, would fall outside the description that it is for the
health, safety, and welfare of its citizens. Second, the argu
ment ignores the fact that all protectionist laws, by defini
tion, can be justified to further some local interest.
In a case with important parallels to this one the Court
considered whether a property tax exemption available to
charitable and benevolent organizations in Maine could have
differential application in order to advantage camps that
served primarily Maine residents as distinct from camps that
served primarily out-of-state residents. See Camps New
found/Owatonna, Inc. v. Town of Harrison, 520 U. S. 564
(1997). The Court was explicit in rejecting the argument
that profit and not-for-profit organizations should be treated
differently with respect to Commerce Clause protection, id.,
at 584, despite the State’s special, historic concern for chari
table assistance within its own borders. The Camps New
found analysis is applicable here: There is “no reason why
the nonprofit character of an enterprise should exclude it
from the coverage of either the affirmative or the negative
aspect of the Commerce Clause.” Ibid. So, too, there is
no reason the governmental character of the bond-issuing
enterprise should exclude it from the coverage of the Com
merce Clause.
The majority concludes its central framework by saying
the market for Kentucky’s bonds is not similar to the market

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372 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
for private issuers because it is the Commonwealth’s own
discrete market. So, it says, Kentucky can discriminate if it
chooses. Quite apart from the principle that discrimination
in explicit terms, purpose, and effect should invalidate this
law, the Court’s argument proceeds, again, from a wrong and
circular premise. The argument that Kentucky bonds are in
a discrete market has no basis in the record. Kentucky
state and local bonds compete with other bonds, as any inves
tor knows. Within the national bond market there is a dis
crete submarket for all state and municipal bonds because
they are tax exempt under the Internal Revenue Code. See
ante, at 332 (citing 26 U. S. C. § 103(a)). The Court, however,
goes on to suggest that within this separate market there
are 41 further discrete markets for bonds in each of the sepa
rate States that have laws like the one before the Court.
Ante, at 342–343. This is wrong because it defines the mar
ket based upon sellers’ purposes rather than upon its inves
tors’ purposes. The latter are the touchstone of market
definition. The Court’s seller-based definition is at odds
with our Commerce Clause jurisprudence. The question
has never been what the beneficiary of the discriminatory
law will do with that benefit; that question relates to the
ends sought by the discriminatory means. See, e. g., Bac
chus, 468 U. S., at 272–273; see also United Haulers, supra,
at 366–367 (Alito, J., dissenting).
The issue in this case, then, cannot be resolved by deter
mining what the issuer does with the proceeds. And to the
extent the Court says there is a consumer preference for a
State’s own bonds within its own borders, this makes the
mistake of defining a market by first assuming the validity
of the discriminatory law at issue. No precedent permits
the Court to define a market in terms of the very law under
challenge for protectionist purposes and effects. This dou
ble counting does not work. If the discriminatory barrier
did not exist, then the national market for all state and mu

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373 Cite as: 553 U. S. 328 (2008)
Kennedy, J., dissenting
nicipal bonds would operate like other free, nationwide mar
kets. The fact that the national market for tax-free state
and municipal bonds is a discrete one serves only to reinforce
the point that it should operate without local restriction.
That the people in each of 49 States that joined a brief in
support of Kentucky are alleged to want the law is irrel
evant. See ante, at 350. Protectionist interests always
want the laws they pass, even if their fellow citizens bear
the burden, for they are positioned to profit from the barrier.
The circumstance that the residents choose to bear the costs
of a protectionist measure (assuming this to be so even
though entrenched interests are the usual source for the law)
has been found by this Court to be quite irrelevant: “This
argument, if accepted, would undermine almost every dis
criminatory tax case. State taxes are ordinarily paid by
in-state businesses and consumers, yet if they discriminate
against out-of-state products, they are unconstitutional.”
West Lynn, 512 U. S., at 203; see also Bacchus, supra, at 272.
That 41 States have local protectionist laws similar to
this one proves the necessity of allowing settled principles
against discrimination to operate in an important national
market. The Court seems proud to say that New York was
the first to enact a protectionist exemption. See ante, at
335. That, too, simply underscores the importance of ad
hering to the rules against state trade discrimination. New
York, as a great financial capital, likely had no trouble raising
money for its own bonds, and so its exemption might have
been thought to be an advantage in some respects. The ex
emption benefits wealthy, high-tax States, allowing those
States to hoard capital that otherwise might travel to issuers
who offer a more competitive deal in pretax dollars. See,
e. g., Blumstein, Some Intersections of the Negative Com
merce Clause and the New Federalism: The Case of Discrim
inatory State Income Tax Treatment of Out-of-State Tax-
Exempt Bonds, 31 Vand. L. Rev. 473, 546 (1978).

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374 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Kennedy, J., dissenting
In the wake of one trade barrier, retaliatory measures fol
low, as the Framers well knew. The widespread nature of
these particular trade barriers illustrates the standard dy
namics of politics and economics, demonstrating once more
the need to avoid validating this law as somehow in the
States’ own interests. By misapplying the rationales of the
controlling precedents, the Court invites further erosion of
the Commerce Clause, which must remain as a deterrent to
experiments designed to serve local interests at the expense
of a national system.
The Court’s categorical approach would seem to allow
States to discriminate against out-of-state, government
bonds in other ways. Nothing in the Court’s rationale jus
tifying this scheme would stop Kentucky from taxing inter
est on out-of-state bonds at a high rate, say 80%, simply to
give its own bonds further advantage. High tax rates de
signed to make out-of-state interests less attractive are not
unheard of in our cases. See, e. g., Fulton, 516 U. S., at 333.
Today the Court upholds a scheme no different in kind from
those patently unconstitutional schemes. Furthermore, the
Court’s approach would permit a State to condition tax-free
treatment of out-of-state bonds on reciprocal treatment in
another State, see ante, at 335–336, n. 7 (citing, for example,
Utah’s reciprocal tax-free treatment of States that do not
tax Utah bonds), leading to the discrete market blocs the
Constitution was designed to eliminate. These examples
underscore the objections already noted.
II
In a part of the opinion joined only by a plurality the anal
ysis concludes the differential taxation scheme is a suffi
ciently diluted regulatory scheme so that the market
participant exception applies. See ante, at 343–348. This
needs little comment. It suffices to note that a “tax exemp
tion is not the sort of direct state involvement in the market

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Kennedy, J., dissenting
that falls within the market-participation doctrine.” Camps
Newfound, 520 U. S., at 593. This expansion of the market
participant exception, if it were unleashed by a majority of
the Court, would be an open invitation to enact these kinds
of discriminatory laws—laws that, until today, the Court has
not upheld in even a single instance. Taxation is a quintes
sential act of regulation, not market participation. See, e. g.,
New Energy, 486 U. S., at 278 (“[I]t [is] clear that Ohio’s as
sessment and computation of its fuel sales tax, regardless of
whether it produces a subsidy, cannot plausibly be analogized
to the activity of a private purchaser”). And even in a case
where a State is a paradigmatic market participant because
it owns the asset itself, downstream restrictions that dis
criminate against interstate commerce are not permitted.
See South-Central Timber Development, Inc. v. Wunnicke,
467 U. S. 82, 98 (1984) (plurality opinion) (“[A]lthough the
State may be a participant in the timber market, it is using
its leverage in that market to exert a regulatory effect in
the processing market, in which it is not a participant”).
III
Throughout the Court’s argument is the concern that,
were this law to be invalidated, the national market for
bonds would be disrupted. See ante, at 353–356. The con
cern is legitimate, but if it is to be the controlling rationale
the Court should cast its decision in those terms. The Court
could say there needs to be a sui generis exception, noting
that the interstate discrimination has been entrenched in
many States and for a considerable time. That rationale
would prompt my own statement of disagreement as a mat
ter of principle and economic consequences, but it would be
preferable to a decision that misinterprets the Court’s prece
dents. Instead, today the Court weakens the preventative
force of the Commerce Clause and invites other protection
ist laws, thus risking further dislocations and market ineffi

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376 DEPARTMENT OF REVENUE OF KY. v. DAVIS
Alito, J., dissenting
ciencies based on the origin of products and commodities
that should be traded nationwide and without local trade
barriers.
For these reasons, in my view, the judgment of the Court
of Appeals of Kentucky should be affirmed.
Justice Alito, dissenting.
I proceed in this case, as I did in United Haulers Assn.,
Inc. v. Oneida-Herkimer Solid Waste Management Author
ity, 550 U. S. 330, 356 (2007) (dissenting opinion), on the as
sumption that the Court’s established dormant Commerce
Clause precedents should be followed, and on that assump
tion, I entirely agree with and join Justice Kennedy’s
dissent.