Justices upend Maryland tax law
Washington — The U.S. Supreme Court ruled that Maryland must reduce taxes on residents who earn money outside the state, in a decision that raises questions about tax-collection efforts across the country.
Maryland officials say the 5-4 ruling means the loss of hundreds of millions of dollars in tax revenues. It also could affect similar tax laws in nearly 5,000 local jurisdictions in other states, including N.Y., Indiana, Pa. and Ohio.
The justices agreed with a lower court that the tax is invalid because it discourages Maryland residents from earning money outside the state.
Writing for the court, Justice Samuel Alito said the tax “is inherently discriminatory” under the Constitution’s Commerce Clause.
Maryland allowed its residents to deduct income taxes paid to other states from their Maryland state tax, but it did not apply that deduction to a local “piggy back” tax collected for counties and some city governments.
The high court said the Maryland tax system unconstitutionally discriminated against interstate commerce. Writing for the court, Alito said the Maryland system “operates as a tariff” on income earned outside the state.
Were it adopted by all 50 states, Maryland’s tax system would result in higher rates on income earned out-of-state than on money earned in-state, he said. The high court didn’t directly address how its reasoning might affect other jurisdictions.
The case split the court along unusual lines. Joining Alito in the majority were Chief Justice John Roberts and Justices Stephen Breyer, Anthony Kennedy and Sonia Sotomayor. Justices Antonin Scalia, Clarence Thomas, Ruth Bader Ginsburg and Elena Kagan dissented.
Maryland officials argued that the state has authority to tax all the income its residents earn to pay for local services like public schools and fire protection and police services.
The case arose after Maryland residents Brian and Karen Wynne challenged their tax bill. They had been blocked from deducting $84,550 that they had paid in income taxes to 39 other states. Brian Wynne’s out-of-state income resulted from his ownership stake in a health care company that operates nationwide.
The Wynnes argued that Maryland was unfairly subjecting them to double taxation and taxing earnings that have no connection to the state.
Bloomberg News contributed.
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