The Washington Post has denounced the inclusion of bonus depreciation in the just-passed tax extenders bill for 2014. The correct term is “partial expensing.” There is nothing “bonus” about it. The...
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Maryland Argues There's No Constitutional Bar to Taxing Over 100% of Residents' Income
This fall, the U.S. Supreme Court will hear Maryland v. Wynne, which asks whether Maryland must provide a credit against local income taxes for income taxes paid to another state. The taxpayers in the case, Mr. and Mrs. Wynne, own 2.4 percent of a company doing business in 39 states. As Maryland residents, they paid $123,434 in income tax to Maryland, after applying a credit of $84,550 for taxes paid to other states on income earned outside Maryland's borders. Maryland disallowed the credit to the extent that it offset the county income tax. The Tax Court upheld the assessment, a Maryland circuit court reversed and sided with the Wynnes, and Maryland's highest court (the Court of Appeals) agreed, ruling the tax unconstitutional without a credit. The state has now appealed to the Supreme Court.
The Wynnes are right and Maryland is wrong. While it is true that tax credits and deductions are usually a matter of legislative grace, and that states may impose just about whatever tax it wishes on its own residents, these powers are limited when they involve interstate commerce. If Maryland is right here, taxpayers will be subject to tax on more than 100 percent of their income. The result would be that intrastate income would be taxed once, while interstate income would be taxed over and over and over. This violates the U.S. Constitution's Commerce Clause.
Maryland has now filed their brief in the case. They spend most of the brief reciting all the cases and reasons why states should have the autonomy to tax its own residents as it sees fit, which I don't dispute. They ultimately do address the Commerce Clause argument, writing that since Maryland taxes all income at the same rate, it is not discriminatory against interstate commerce. That of course requires ignoring the effect of the law, which subjects interstate income to multiple taxation. Maryland taxes residents' income, wherever it was earned. Because other states tax income earned within their borders, the result is taxing more than 100% of taxpayers' income.
Frankly, this case has shocked the academic and practitioner community. Most of us took it as a given that a state income tax without a credit for taxes paid to another state is inherently unconstitutional because of these discriminatory effects. We'll be filing a brief in the case and we hope the U.S. Supreme Court agrees with the court below and with the taxpayers.
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