U.S. Supreme Court Rules Maryland Double Taxation Unconstitutional
Last week, the U.S. Supreme Court decided in a 5-4 decision that Maryland residents cannot be taxed twice on money they earn from out-of-state. The Center for State Fiscal Reform supports the Court’s decision, as was outlined in the ALEC amicus brief for the case, and believes this is a victory for taxpayers and sound tax policy.
Until now, when Maryland residents earned money in another state, they paid income taxes to the state where they earned the income and were then taxed by Maryland on the same income without any tax credit for Maryland’s county level income tax. Most states offer a full tax credit for income taxes paid to other states, but Maryland did not. As such, Maryland residents with income from other states would be taxed twice on the same income.
The Wynne’s, a family from Maryland, argued that this double taxation was unconstitutional, citing the dormant commerce clause. This interpretation of the Constitution’s commerce clause holds that states are prohibited from adopting protectionist economic policies that discriminate against interstate commerce. Maryland argued that states have the right to tax their residents however they see fit, regardless of other state’s taxes they may be paying. The Court sided with the Wynne’s, meaning that Maryland must now offer a full tax credit for income taxes paid to other states. It also means that the few other states not offering a full tax credit will likely have to start.
The American Legislative Exchange Council, along with several other organizations, including the U.S. Chamber of Commerce, Council on State Taxation and National Federation of Independent Businesses’ Legal Center, filed amicus briefs with the U.S. Supreme Court for this case in support of the Wynne’s. In addition to outlining how the dormant commerce clause applied to this case, the ALEC amicus brief explained that allowing states to double tax out-of-state income is bad policy. Taxpayers should be able to earn income wherever they find the best opportunities without being taxed twice if that happens to be in another state.