Nothing discourages effort like being penalized for hard work. Taxation is one of the biggest penalties government assesses on our efforts.
Getting two tax bills for the same income feels like getting punched in the gut twice, but Maryland and other states have been taxing double on the same taxpayer income for some time. That practice is coming to end thanks to the Supreme Court.
In a 5 to 4 ruling, Justices agreed with a lower court’s opinion that the state’s practice of not granting a credit to residents for income tax paid outside of the state is the same as double taxation and violates the Constitution. The Court said it violated the commerce clause because it might discourage individuals from doing business across state lines.
In most states, a taxpayer receives a full credit for income taxes paid on out-of-state earnings. Maryland allows residents to deduct income taxes paid to other states from what they pay in Maryland income tax, but that same deduction is not applied to a “piggyback” tax collected by the state for counties and the city of Baltimore. While the current Maryland personal income tax is 5.75 percent, the piggyback tax is up to 3.2 percent in each of the state’s 23 counties and Baltimore.
Some 55,000 Maryland taxpayers have in essence been double taxed. One couple learned that the hard way paying an estimated $25,000 in taxation which the Supreme Court now says are not legal. The Wynnes owned half of a homecare and medical staffing company that does business in more than 36 states and reported an income of $2.7 million in 2006.
The state is nervous; they are on the hook for an estimated $200 million in refunds and interest to taxpayers like the Wynnes. They are also losing an estimated $42 million a year in revenue going forward.
The Washington Post reports:
The ruling in Comptroller of the Treasury of Maryland v. Wynne also potentially affects thousands of other cities, counties and states with similar tax laws, including New York, Indiana, Pennsylvania and New York.
The court was sharply divided, although not along the usual ideological lines. Justice Samuel A. Alito Jr. wrote the opinion for a majority that comprised him, Chief Justice John G. Roberts Jr. and Justices Anthony M. Kennedy, Stephen G. Breyer and Sonia Sotomayor.
Alito said the court has long recognized that the commerce clause has a “dormant” or underlying meaning. This holds that while the clause gives Congress the power to regulate commerce among the states, it also was intended to ensure that states would not pass laws to restrict interstate business.
State officials argued that under the due process clause of the Constitution, states have a historic right to tax the income of their residents, no matter where it is earned.
But Alito said Maryland’s argument is flawed because states have long offered a similar credit for out-of-state taxes paid by corporations, who “also benefit heavily from state and local services.”
Justices Ruth Bader Ginsburg, Antonin Scalia, Elena Kagan and Clarence Thomas dissented, with Ginsburg, Scalia and Thomas writing separate opinions.
Ginsburg, writing the principal dissent, said there was nothing in the Constitution that compelled Maryland — or any other state — to change its laws because of taxes paid by its residents elsewhere.
It seems senseless that any of the Justices would uphold a patently unfair double taxation on the incomes of hardworking Americans, but nevertheless we are entitled to celebrate what is an enormous victory for taxpayers—and the law.
State officials are balking at the lost revenue, especially in Montgomery County, one of the nation’s wealthiest counties, which stands to lose big from the busted piggyback tax.
What could Maryland taxpayers have done with all of that lost tax revenue? The economic impact of more discretionary income could’ve yielded great benefits. They could’ve reinvested that money in their businesses and hired more workers or expanded. They could’ve spent more in the local economy on dining, entertainment, sports, and shopping. The rippling impact of economic stimulation is usually greater than the hard tax dollars that get lost in the belly of state coffers.
When considering where to live and where to do business, taxes are a consideration. taxpayers.
Maryland and the other states will have to find a way to replace the lost revenue, and I’m sure they are already busy at work scheming something up. I just hope it won’t be through something as pernicious as the piggyback tax.