Multiple Taxation Vexation

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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. 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.

Specifically, in Comptroller v. Wynne the Supreme Court will determine whether the U.S. Constitution requires states to give a credit for taxes paid on income earned out-of-state. A decision against Maryland’s Comptroller in this case will limit county 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 for income taxes paid to other states, Maryland’s Comptroller did not grant the Wynnes a credit for Maryland’s county tax.

Maryland’s highest state court held that Maryland’s failure to grant a credit for 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 a county 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.”

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.

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About the author: Lisa Soronen is the Executive Director of the State and Local Legal Center and a regular contributor to CitiesSpeak.