In a 5-4 decision in Comptroller v. Wynne the Supreme Court held that Maryland’s failure to offer residents a full credit against income taxes paid to other states is unconstitutional. The State and Local Legal Center (SLLC)/International Municipal Lawyers Association (IMLA) filed an amicus brief in support of Maryland.
Maryland taxes residents’ income earned in- and out-of-state. If Maryland residents pay income tax to another state for income earned there, Maryland allows them a credit against Maryland’s “state” tax but not its “county” tax. Maryland also taxes nonresident income earned in the state. Nonresidents pay Maryland “state” tax and a “special nonresident tax” equivalent to Maryland’s lowest “county” tax.
The Wynne’s of Howard County, Maryland, received S-corporation income that was earned and taxed in numerous other states. They challenged Maryland’s failure to allow them to claim a credit against their Maryland county taxes as violating the dormant Commerce Clause, which prevents states from discriminating against or excessively burdening interstate commerce. The problem with Maryland’s tax scheme the Court reasoned was that it had the potential to result in double taxation of income earned out-of-state. More specifically, it failed the “internal consistency” test. This test “looks to the structure of the tax at issue to see whether its identical application by every State in the Union would place interstate commerce at a disadvantage as compared with commerce intrastate.” If all states had a tax scheme like Maryland’s “county” and “special nonresident tax” that taxed income residents earned in-state, income residents earned in other jurisdictions, and non-residents income earned in-state, residents who earn income out-of-state would be taxed by their state of residence and the state where they earned the income.
Dissenting Justices Ginsburg, Scalia, and Kagan were sympathetic to the argument the SLLC/IMLA made that residents should not be able to avoid paying taxes for the services they use locally like education, infrastructure, and public safety even though they may also owe taxes to other states.
Justice Ginsburg also pointed out: “A State can require all residents and nonresidents who work within the State under its protection to contribute equally to the cost of that protection. Or the State can seek to avoid exposing its workers to any risk of double taxation. But it cannot achieve both objectives. For at least a century, responsibility for striking the right balance between these two policy objectives has belonged to the States (and Congress), not this Court.”
The Court said Maryland could fix its tax scheme by granting a full credit for income taxes paid to other states. According to Mark Walsh in School Law Blog, Maryland estimates that as a result of this decision it will owe $200 million in refunds and will collect $42 million less annually in county taxes. At least two other states, Wisconsin and North Carolina, also don’t offer credits for all income taxes paid to other states. Also, numerous local governments require non-residents to pay income taxes. Resident states may now be required to offer tax credits for non-resident city income taxes paid to other states, if they don’t already.
The Court also suggested that Maryland may be able to bring its tax scheme into compliance by eliminating the “special nonresident tax,” which of course would not help the Wynne’s. Bradley Joondeph writing for SCOTUSblog notes that doing so “would not ‘fairly apportion a taxpayer’s income among the states in which it was earned – a requirement the Court has held the Commerce Clause imposes on corporate income taxes.” Only time will tell whether the Court will hold that unapportioned personal income taxes violate the Commerce Clause.
Noteworthy about this decision is the unusual lineup of Justices. Justice Alito wrote the majority opinion which was joined by Chief Justice Roberts, and Justices Kennedy, Breyer, and Sotomayor. Justices Scalia, Thomas, Ginsburg, and Kagan dissented.
Paul Clement and Zack Tripp of Bancroft wrote the SLLC/IMLA brief. The National Conference of State Legislatures, the National League of Cities, the National Association of Counties, the International City/County Management Association, the United States Conference of Mayors, and the Government Finance Officers Association joined the brief.