The Supreme Court heard oral arguments on the constitutionality of Maryland’s personal income tax and whether it is fair for the state to deny credit for taxes paid by residents to other states.
The case, Comptroller of the Treasury of Maryland v. Wynne, involved a Maryland resident, Brian Wynne, who is part owner of Maxim Healthcare Services, a nationwide health care company that is based in Columbia, Md., but is also taxed in other states where it operates.
Wynne and his wife Karen’s attorneys argued that Maryland’s income tax laws violate the Commerce Clause of the Constitution by limiting the tax credits for taxes paid to localities in other states. The question before the court was whether a state tax that exposes interstate commerce to double taxation is saved from invalidation under the Commerce Clause merely because the state imposes the tax upon its own residents. The justices appeared to be divided over the question during oral arguments Wednesday. Maryland’s high court ruled against the state last year, and during the Supreme Court arguments, Maryland’s acting solicitor general, William Brockman, received the most questions from the Supreme Court justices, according to The Wall Street Journal.
“A state’s broad power to impose a personal net income tax on its own residents is grounded in the special benefits that a state affords to its own residents particularly because they are residents,” said Brockman. “That is, things like public schools, social services programs, medical assistance services, and of course the right to vote in the process that determines both the level of those benefits and the level of taxes that are paid in return for them. There is no reason that a state should have to subordinate this power, this taxing power, just because another state, exercising an equally legitimate taxing power, but on a very distinct ground, is taxing a portion of that income merely because it was earned within that state's borders.”
Justice Antonin Scalia asked him, “You’re on the principle that life is not fair, right?”
Brockman quipped, “Life is not fair. Maryland taxes are.”
More seriously, he added that all Maryland residents are treated the same and are taxed on their entire income, regardless of where it is earned.
Chief Justice John Roberts cited the opposing side’s argument that if one does an “internal consistency test,” the tax ends up being unequal.
“What it ends up is imposing a special tax,” said Roberts. “They even call it special, right—the special nonresident's tax—on those who live in one state and work in the other, that people who live in the state and work in the state do not have to pay. That sounds unequal, whether fair or not.”
Justice Samuel Alito was also skeptical. He cited an amicus brief submitted by a group of tax economists and said, “What you’ve done operates exactly like a tariff, because it provides an incentive to earn income in Maryland and not outside of Maryland.” According to SCOTUSblog, state tariffs would be the quintessential violation of the Commerce Clause.
Brockman responded that the brief switched between taxes and tariffs, while the case revolved around two states’ taxes, and the validity of Maryland’s tax would turn on how another state exercises its taxing powers.
Eric Feigin, assistant to the U.S. Solicitor General, pointed out, “I think the important thing to understand here is we’re talking about two very different kinds of income taxes with distinct jurisdictional rationales. Maryland is taxing respondents’ income because they are residents of Maryland. Other states are taxing income because they do business there. I’m not sure you would necessarily look at them and mix and match.”
The Wynnes’ attorney, Dominic Perella, argued that Maryland’s tax amounted to a tariff. “A tariff is the quintessential unlawful tax under the dormant commerce clause,” he said.
He pointed to the example of a hot dog stand. “As my opponent on the other side conceded, a small business like a hot dog stand could operate in two different states,” said Perella. “It might not be California and Hawaii, but wherever it might be, and it would be exposed to 100 percent double taxation, the only limitation would be the rate that the state chooses to set on that.
Justice Stephen Breyer pointed out, however, that other taxes would also apply out of state. “When you do business in California and you live somewhere else, your hot dog stand is going to be subject to pretty high property taxes,” he said. “It’s going to be subject to special use taxes. It’s going to be subject to taxes that they have for one time to finance the schools.”
Justice Ruth Bader Ginsburg also appeared to be skeptical of the argument that the Wynnes did not owe taxes to the state where they lived. “Mr. Perella, suppose we had a Maryland resident and all that resident’s income is earned out of state,” she said. “And each of the states where the income is earned tax at or above the Maryland rate. That would mean, I suppose, that the Maryland resident owes nothing to Maryland because he could take a credit for all what he’s—leaving the resident without anything, without a penny from this resident who may have five children that he sends to school in Maryland.”
Perella agreed that could happen, but added that it happens rarely. He also pointed out that Maryland has reciprocal agreements with surrounding jurisdictions such as Washington, D.C., Virginia and Pennsylvania to tax commuters in their state of residence.
Justice Anthony Kennedy objected, “This man is getting a free ride” in Maryland schools.
Perella disagreed, saying Wynne is paying substantial income taxes to the other states where his income is earned.
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