The U.S. Supreme Court on Monday struck down a Maryland tax program that results in double taxation of income for some taxpayers, a decision that could reduce state and county funding available for schools and affect education finance elsewhere.
The Maryland system taxes the income its residents earn inside and outside the state, as many states do. But if Maryland residents pay income tax to another state for income earned in that other state, Maryland allows a credit for a state portion of its income tax. It refuses, however, to allow such a credit against a “county” income tax of up to 3.2 percent of that out-of-state income. Maryland counties play a key role in funding local school systems.
“The effect of this scheme is that some of the income earned by Maryland residents outside the state is taxed twice,” Justice Samuel A. Alito Jr. wrote in a 5-4 decision in Comptroller of the Treasury of Maryland v. Wynne (Case No. 13-485).
The state’s system “has the same economic effect as a state tariff, the quintessential evil targeted by the dormant Commerce Clause,” Alito added, referring to the concept that the U.S. Constitution’s provision giving Congress the power to regulate interstate commerce has a flip side—that the states may not improperly burden such commerce.
There was an unusual lineup in the case as Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Stephen G. Breyer, and Sonia Sotomayor joined Alito.
Justice Ruth Bader Ginsburg wrote the principal dissent that was joined by Justices Antonin Scalia and Elena Kagan. Justice Clarence Thomas wrote a separate dissent largely joined by Scalia (who also wrote a separate dissent joined in part by Thomas).
State Services for State Residents
Justice Ginsburg highlighted an issue that was raised in some briefs in the case and at oral argument: that with the Supreme Court’s approval, the states have long favored their own residents over nonresidents in the provision of local services such as schools.
“The cost of services residents enjoy is substantial,” Ginsburg said, citing state figures that in 2012 Maryland and its local governments spent over $11 billion to fund public schools, $4 billion for state health programs, and $1.1 billion for the state’s food supplemental program—"all programs available to residents only,” she said.
“Excluding nonresidents from these services, this court has observed, is rational for it is residents who fund the state treasury and whom the state was created to serve,” Ginsburg continued. “A taxpayer’s home state, then, can hardly be faulted for making support of local government activities an obligation of every resident, regardless of any obligations residents may have to other states.”
In the majority opinion, Justice Alito rejected arguments that states should have a free hand to tax their residents’ out-of-state income because states provide their residents with many services.
He noted that the income at issue in the case passed through to a Howard County, Md., couple, Brian and Karen Wynne, by way of their shares in an S Corporation, a federal tax structure frequently used for family and closely held businesses.
Alito said Maryland’s argument must fail “because corporations also benefit heavily from state and local services.”
“Corporations rely on local schools to educate prospective employees, and the availability of good schools and other government services are features that may aid a corporation in attracting and retaining employees,” Alito said. “Thus, disparate treatment of corporate and personal income cannot be justified based on the state services enjoyed by these two groups of taxpayers.”
Effects Beyond Maryland Uncertain
There seemed to be disagreement among legal analysts about the practical effects of the decision because Maryland’s approach was considered to be somewhat of an outlier.
Still, Maryland officials estimated the state would owe some $200 million in refunds and interest to the Wynnes and others in their situation. And deductions required by the decision could cost the state about $42 million per year, the comptroller’s office estimated.
David Nitkin, a spokesman for Maryland Attorney General Brian Frosh, said in a statement that the decision “creates severe challenges for counties looking to meet the education, public safety and infrastructure needs of Marylanders.”
A version of this news article first appeared in The School Law Blog.