The Supreme Court Speaks, Maryland’s Double Taxation Is Unconstitutional
Many states in our nation suffer the effects of over-taxation. Whether it’s high state income taxes pushing families to seek brighter economic climates or high corporate taxes compelling businesses to relocate their headquarters, taxes play a huge role in how state economies function.
One of the most contentious and potentially damaging practices is that of “double taxation” – a practice common in the state of Maryland. States typically give residents a full credit for income taxes they pay on out-of-state earnings. However, Maryland placed a restriction on many residents, allowing them to claim a credit on some (but not all) of their taxes paid on earnings outside the state.
Last week, the issue of “double taxation” became not just egregious but unconstitutional, per a ruling of the United States Supreme Court. This decision upholds a 2013 Maryland Court of Appeals ruling that the state’s income tax structure is unconstitutional. The original challenge to the law came from Maryland couple Brian and Karen Wynne, who argued that being forced to pay income tax once in another state and then pay it again in Maryland amounts to illegal double taxation. In a 5-4 decision, the Supreme Court concurred, stating that the Maryland tax law improperly punishes interstate commerce – a violation of the United States Constitution’s commerce clause.
Speaking for the majority, Justice Samuel Alito explained that, in addition to giving Congress the power to regulate commerce among the states, the clause also exists to make sure states do not pass laws that would restrict interstate business. Justice Alito went further to call the Maryland tax policy “inherently discriminatory.”
If it so chooses, the Maryland legislature could correct this “double taxation” by offering credits. If the legislature takes this approach, certain Maryland small-business owners (about 55,000 taxpayers) would be able to claim a credit or apportionment for taxes they pay to another state on income earned in that state. Under this scenario, taxpayers who attempted to claim the credit between 2006 and 2014 are likely to be eligible for refunds.
While the Maryland decision is certainly important (and represents a necessary step toward reform in a very heavily tax-burdened state), what’s even more important is the implications it may have for “double-taxation” scenarios elsewhere in the United States. According to a brief filed by the International Municipal Lawyers Association, other states (including North Carolina and Wisconsin) and cities (including New York City, Philadelphia, Cleveland, Detroit, St. Louis, and Kansas City) could be affected owing to similar “double taxation” practices. In all, more than 5,000 localities could be impacted by the decision.
Especially deserving of scrutiny are the “telecommuter taxes” that New York imposes on people who work from home; these residents are taxed both by their home state and by the state in which their employer is located. Additionally, Philadelphia, St. Louis, and Kansas City levy an earnings tax that requires them to pay a percentage of their earnings to the city in which they work. For example, a resident of St. Louis who works in Illinois would pay Illinois income tax on her income in Illinois and then have to pay an additional 1% income tax to the City of St. Louis, without any credit for the tax already paid on that income in Illinois.
