U.S. Supreme Court justices will scrutinize a Maryland couple’s tax bill today as part of a case that tests whether states have to offer their residents a tax credit for income taxes they pay in other states. Brian and Karen Wynne insist their 2006 tax bill was $25,000 too high.
The husband and wife, who earned money from a nationwide health care business, argue that Maryland’s tax policy violates the Constitution’s commerce clause by discouraging them from doing business across state lines, lest they face multiple taxes on the same income. The state of Maryland, however, contends that states have the sovereign power to tax residents as they see fit and that residents should have to contribute to public services such as schools through taxes on their income -- no matter where that income is earned. If Marylanders don’t like the tax policy, goes the state’s argument, then they can vote to change it.
“It’s a sleeper case to be sure, but if the Court rules for Maryland on it, people are going to find out about it pretty fast," says attorney Joseph Henchman, a policy analyst at the nonpartisan Tax Foundation. The research outfit supported the Wynnes in a friend-of-the-court brief, as have groups including the U.S. Chamber of Commerce, the Maryland Chamber of Commerce and the National Federation of Independent Business.
Every state offers its residents credit for taxes paid to another state, according to Henchman. But in Maryland’s case, such credit doesn’t apply to income taxes assessed at the county level. Left unchecked, the tax scheme has the potential to “devastate” interstate commerce, Henchman says. “If the Wynnes want to minimize their tax burden, they should stop investing in other states: that’s the signal Maryland is sending,” he says.
A phalanx of state and local government organizations disagrees that Maryland’s tax scheme restricts commerce. “This is a pure and simple sovereignty issue of a state’s authority, as a sovereign, to tax its own residents,” says Chuck Thompson general counsel and executive director of the International Municipal Lawyers Association, which submitted a brief in support of Maryland. Groups signing on to that brief include the National Conference of State Legislatures, the National League of Cities and the U.S. Conference of Mayors, among others.
At the same time the case has unfolded in lower courts, state and local economies have grappled with their ability to raise revenue after the Great Recession. In 29 states, for example, tax receipts have yet to return to prerecession levels, according to the Pew Charitable Trusts.
A high court ruling against Maryland on the sovereignty issue would deal states, cities and counties another blow, according to Thompson. “For a person to absorb the best a community can provide and sit back and not pay anything is just not right from a practical standpoint,” he says.
The origins of Comptroller of the Treasury of Maryland v. Wynne date to Brian and Karen Wynne’s 2006 income tax return. That year, the couple owned a stake (2.4 percent) in Maxim Healthcare Services, a company that Brian Wynne had helped to build. They wound up owing taxes to 39 other states. So when it came to the $126,636 they owed the state of Maryland, the Wynnes claimed a credit for $84,550. But the credit didn’t extend to Howard County, Maryland, where the Wynnes lived. They still owed $81,348 in taxes at the local level. The Wynnes have fought this “partial credit” tax scheme in court, claiming that it penalizes them for earning money out of state and discriminates against interstate commerce.
“In total, they paid over $25,000 more in state income taxes, simply because they (through Maxim) did business across state lines,” their petition states. Maryland’s court of appeals, the state’s highest court, took the Wynne’s side and ruled that Maryland’s tax law violated the commerce clause.
So the state of Maryland asked the U.S. Supreme Court to take up the case. The fact that the justices agreed to do so may already provide a clue about how they’re leaning, as they could have simply let the lower court ruling stand.
“In most of these kinds of situations where the Court takes a decision from a state supreme court like this, it’s to reverse it,” says Prof. Edward Zelinsky, a tax law expert at Yeshiva University’s Cardozo School of Law.
According to the state’s petition, “the lower court’s ruling wrongly demands that Maryland yield in the exercise of its taxing power to other sovereigns, even though Maryland provides extensive benefits (free public schooling, public assistance, etc.) that those other sovereigns do not provide to Maryland residents.”
The state also argues that residents have the power of the ballot box at their disposal. “[I]f Maryland residents are displeased with their taxes,” the state’s petition says, “they not only have the political capacity, as eligible Maryland voters, to press for changes to the State’s tax laws but they can also appeal to Congress.”
Zelinsky, who has publicly debated the case with the Tax Foundation’s Henchman, says Maryland has a point. “I’m a big believer that ultimately taxes are a matter of politics, and ultimately that’s why the Wynnes don’t need the protection of the Court,” he says.
Even if the Wynnes lose, “that’s not end of the battle,” Zelinsky says. “They can pick up the phone to their state legislature and say, let’s try to get the law changed.”