On May 18, 2015, the United States Supreme Court declared a provision of Maryland’s State Income Tax unconstitutional as discriminatory against interstate commerce, and thereby in violation of Article I, Section 8 of the United States Constitution.
The case is Comptroller v. Wynne. The specific and technical issue is that Maryland’s personal income tax has (as all Maryland taxpayers know) both a State and a County tax.
Maryland taxes the personal income of its residents, regardless of whether that income is earned in Maryland or in other states. The Maryland tax code then grants a credit for taxes paid to other states, but only to offset the State (and not the County) component of the tax.
In plain English, this means that for Maryland residents, out-of-state income is taxed more than in-state income because out-of-state income is taxed twice: once by the state where it is earned, and then again under the Maryland Tax Code. This, in the words of the Court’s majority, acts as “a state tariff” which creates an incentive for in-state commerce and a disincentive for interstate commerce.
The Court’s majority opinion was authored by Justice Samuel Alito, who relied on a constitutional doctrine known as the “dormant Commerce Clause.” This doctrine uses a broad, exclusive reading of Article I, Section 8 of the Constitution, which grants to Congress the power “to regulate Commerce … among the several States.”
The purpose of the Framers in granting this power to Congress was (in the words of the majority opinion) “the conviction that in order to succeed the new Union would have to avoid the tendencies towards economic Balkanization that had plagued relations among the Colonies.” Therefore, the Supreme Court has read this constitutional clause to not only expressly grant to Congress the power to regulate interstate commerce, but to impliedly deny to the States any power to interfere with or tax interstate commerce. “This means, among other things, that a State may not tax a transaction or incident more heavily when it crosses state lines than when it occurs entirely within the State.”
Brian and Karen Wynne are Maryland residents who, in 2006, were investors in a Sub-S Corporation that had earned income (and was taxed) in various states. They challenged Maryland’s double taxation, prevailed before Maryland’s Court of Appeals. The Comptroller of Maryland appealed , and now the Supreme Court has affirmed.
Justice Alito’s opinion was joined by the unusual majority of Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer, and Sonia Sotomayor. The dissenters broke into two groups.
One line of argument, authored by Justice Ruth Bader Ginsberg, argued that Maryland (and any State) had the authority to tax its citizens as it saw fit, and that “this case is about policy choices” that is the right of State to determine for itself.
Justices Antonin Scalia and Clarence Thomas would have gone further, and declared the dormant Commerce Clause “a judicial fraud” nowhere found in the Constitution — a judge made rule that should be overturned.
The case does not break new ground, but maintains the prohibition against any State establishing “a state tariff” and disfavoring income earned in other places.
This is not to say that States will not continue to try. It is always politically easier to tax income earned elsewhere – a point once made by the Monty Python comedians when (in Episode 15 of the Flying Circus) John Cleese, playing a British politician, announced: “Gentlemen, we have to find something new to tax;” and was met with the helpful suggestion that “To boost the British economy, I’d tax all foreigners living abroad.”