The U.S. Supreme Court has ruled a case of double taxation in Maryland’s income tax system is unconstitutional.
Maryland state and local governments had treated income earned elsewhere as if it were earned in-state, charging Maryland-based income taxes in addition to the taxes the individuals paid to the states where their income was earned.
The decision in Comptroller of the Treasury of Maryland v. Wynne upheld a 2013 Maryland Court of Appeals ruling, which concluded the state was illegally “double taxing” residents’ income.
Maryland Taxpayers Association President Dee Hodges says the ruling will have a big effect on the state’s taxpayers.
“It’s estimated 55,000 Maryland residents will benefit from this decision,” Hodges said.
“A lot of Maryland residents didn’t even realize they were paying a ‘piggyback tax’ to the counties when they filed their taxes,” Hodges said. “It averaged around 3 percent, and in Howard County, where the Wynnes live, it was 3.25 percent.”
Hodges says local government budgets in Maryland will be thrown into chaos due to their reliance on the illegal tax structure for revenue.
“Maryland counties now owe approximately $200 million back to residents for refunds since 2006, and it’s estimated that it will cause a $42 million annual shortfall,” Hodges said.
Will Affect Other States
Cato Institute Senior Fellow and Maryland resident Walter Olson says the decision will directly affect future tax cases.
“The Court confirmed that it will look at issues of double taxation,” Olson said. “Those will sometimes come up in other contexts.”
Olson says taxing economic activity across state lines quickly becomes complicated.
“The whole issue of state taxation of interstate activity is a big, complicated one, which is always made interesting by the fact that the states would love to grab more than their share of revenue,” Olson said.
“I think the Supreme Court saw this as a case where it could do away with a pretty obvious injustice, but the way in which it did so, with the so-called ‘Dormant Commerce Clause,’ interests many of the constitutional law scholars about this case,” he said.
Olson said the Supreme Court may have made the right call for the wrong reasons.
“There is no explicit wording in the Constitution saying that when states get too frisky about regulating or taxing the economic activity in other states, they are interfering with the national market and implicitly with the federal government’s power to keep an open interstate market.”
Olson says the Supreme Court sometimes defers to legal precedents over what is written in the Constitution.
“The Supreme Court has generally agreed, for many, many years, that it will strike down some state laws that interfere with economic activity in other states,” Olson said. “But you have these odd alignments on the Supreme Court in which many of the justices are swayed by precedent and say that ‘the Court has been enforcing these ideas for a long time; we’re not going to go back and check with the Framers and overturn something that’s been accepted by the Court for a long time.'”
Elizabeth BeShears ([email protected]) writes from Birmingham, Alabama.