The Supreme Court on Monday, May 18, ruled in a split decision that Maryland’s income tax law is unconstitutional, as it fails to provide residents who pay income tax outside the state a full tax credit. The ruling is expected to cost Maryland localities, as well as other states and cities with similar practices, millions of dollars in revenue.
In a 5-4 vote, the high court affirmed a 2013 Maryland Court of Appeals decision, which ruled that Maryland’s practice of withholding a credit on the county portion of the state income tax is a violation of the Commerce Clause, as it may turn people away from engaging in interstate business.
Most states tax income earned elsewhere both where it is made and where the taxpayer resides. To protect against double taxation, states typically grant such individuals full credit for income taxes paid on out-of-state earnings.
In Maryland, residents receive a full credit for state income taxes, which comes at a top rate of 5.75 percent. The state also collects a “piggy back” tax of 3.2 percent, which is imposed on residents of counties and the city of Baltimore. For the 3.2 percent tax, no credit is offered.
With the court’s ruling, Maryland taxpayers who attempted to claim the county credit on their income tax returns between 2006 and 2014 will likely be eligible for refunds. This could come out to a total of $200 million with interest, according to the state Comptroller’s office.
Additionally, the number of Maryland residents who are able to claim both credits is expected to cost the state an estimated $42 million annually in revenue.
The ruling is also expected to affect many cities, counties and states with similar tax laws. A brief filed by the International Municipal Lawyers Association in the case states that North Carolina and Wisconsin have similar systems; cities such as Cleveland, Detroit, Kansas City, New York, Philadelphia and Wilmington, Del. were also included in the list.
The case decided by the high court was a suit filed by couple Brian and Karen Wynne, who reported a 2006 income of $2.7 million, about half of which came from their stake in Colombia-based Maxim Health Care Services. The business operates in more than 36 states.
The couple paid $123,363 in Maryland state income tax and claimed a state credit of $84,550 in taxes paid in other states on income from Maxim, The Washington Post reported.
With no credit for the piggyback tax, the Wynnes, who live in Howard County, and their attorneys argued this represented approximately $25,000 in illegal double taxation.
In the majority opinion, Justice Samuel Alito wrote that the tax practice leaves certain residents no choice but to pay income taxes to various jurisdictions.
“Today, the near-universal state practice is to provide credits against personal income taxes for such taxes paid to other states,” he wrote.
Alito was joined by Chief Justice John G. Roberts Jr., and Justices Stephen G. Breyer, Anthony M. Kennedy and Sonia Sotomayor.
In the dissenting opinion, Justice Ruth Bader Ginsburg said the issue should be decided on by the states.
“This case is, at bottom, about policy choices,” she said. “Should states prioritize ensuring that all who live or work within the state shoulder their fair share of the government? Or must states prioritize avoidance of double taxation?”
Joining Ginsburg in the dissent were Justices Antonin Scalia, Elena Kagan and Clarence Thomas.
Before Maryland begins issuing refunds to eligible residents, state attorney general Brian Frosh will verify that refunds need to be made. Money for the refunds will come from Maryland’s income tax reserve fund.
(With reports from Forbes, The Washington Post and USA Today)