Multiple Taxation Vexation

Taxpayers X and Y live in the same state and have the same income but Taxpayer X earns all of her income in-state while Taxpayer Y earns all of her income out-of-state.Supreme Court  Taxpayer Y pays more in taxes because she pays income taxes out-of-state and pays a county income tax in her home state.  Unfair?  (Not necessarily.  After all, Taxpayer Y receives government services in the county where she resides.)  Unconstitutional?  The Supreme Court will decide.

The Supreme Court hasn’t decided a state and local government tax case since Armour v. Indianapolis, during the Court’s 2011 term.  In Comptroller v. Wynne it will decide an issue of first impression:  whether a state must offer a credit to its residents for all income taxes paid to another jurisdiction.  A decision against Maryland’s Comptroller would limit state and local taxing authority nationwide.

The Wynnes of Howard County, Maryland, received S-corporation income that was generated and taxed in numerous states.  Maryland’s Tax Code includes a county tax.  While Maryland law allowed the Wynnes to receive a tax credit against their Maryland state taxes for income taxes paid to other states, it did not allow the Wynnes to claim a credit against their Maryland county taxes.

Maryland’s highest state court held that Maryland’s failure to grant a credit against Maryland’s county tax violated the U.S. Constitution’s dormant Commerce Clause, which denies states the power to unjustifiably discriminate against or burden interstate commerce.  Among other things, the Maryland Court of Appeals noted that if every state imposed acounty tax without a credit, interstate commerce would be disadvantaged.  Taxpayers who earn income out of state would be “systematically taxed at higher rates relative to taxpayers who earn income entirely within their home state.”

As this blog previously discussed here and here, the International Municipal Lawyers Association (IMLA) filed an amicus brief, joined by the U.S. Conference of Mayors, the National Association of Counties, and the International City/County Management Association asking the Supreme Court to decide this case.  IMLA’s brief notes that the lower court’s decision could reduce local income tax revenue in Maryland by up to $50 million annually.  More significantly, the brief points out “if every state is required to accord its residents a dollar-for-dollar credit for all income taxes paid to out of state recipients (including counties and cities in other states), the flow of funds to in-state municipalities will be vastly curtailed.”  Almost 5,000 local governments levy local taxes and many do not grant a complete credit for all income taxes paid in other states.

The State and Local Legal Center will file an amicus brief in support of the Comptroller in this case.

Image courtesy of Flickr by Mark Fischer (creative-commons license, no changes made).

(This post was updated to make minor clarifications at 12:45 pm on 6/4/2014)