Last week, the United States Supreme Court released a 5-4 decision in the case of Comptroller of the State of Maryland vs. Wynne. Most commentary on the decision has focused on the odd voting alignment in that case which had Scalia and Thomas dissenting along with Kagan and Ginsburg with a majority of Roberts, Alito, Kennedy, Breyer and Sotomayor. As most commentary has noted, this is the first time this voting alignment has been seen and likely the last.
To recap, Maryland has a state income tax which has two components- state and county. The state collects both taxes then remits apportioned amounts to the counties. Like most states, taxpayers receive credit for taxes on income paid in other jurisdictions EXCEPT when it comes to assessment for the county portion of that tax. In those cases, the full income is taxed. The Wynnes earned about $2.7 million in the year in question, some of it earned out-of-state. They did receive credits for taxes paid to other states, but not on the county portion which, they claim, cost them about $25,000 in additional taxes that year. In effect, they were arguing that they were double taxed and that the Maryland taxing scheme violated the Constitution’s Commerce Clause- although indirectly.
To understand this argument and the dissent by Scalia and Thomas, one needs to understand a concept called the Dormant commerce clause. The Constitution specifically states that Congress has the exclusive power to regulate commerce among the states. Implicit in that enumerated power is a negative aspect- states do not have the power to pass laws, regulations or tax schemes that impinge on interstate commerce. Although not explicitly stated in the text of the Constitution, there are clues from the Federalist papers, the Convention’s notes and other sources that our Founders intended the free flow of commerce among the states and that if there was to be any regulation, it would come from the federal Congress. In fact, the concept of the Dormant Commerce Clause- clearly a judicial construct that dates back to the days of John Marshall- is well-accepted today. Scalia objects stating that although it may appear as a rationale in other sources, it is nowhere to be found in the text of the Constitution and to the extent that it exists (nominally), it is against the clear wording of the Tenth Amendment which leaves the clearly unenumerated powers and rights to the states. He has accepted but dissented in these cases under stare decisis.
The Court determined, in an opinion written by Alito, that the Maryland tax scheme acted essentially like a tariff- the prototypical violation of the Dormant Commerce Clause. That is, the failure to provide a full credit for taxes paid out-of-state on the county portion of the Maryland state income tax served to encourage intrastate commerce to the detriment of interstate commerce. This argument was bolstered by the fact that the state imposes a county tax on non-residents doing business within that county.
Maryland’s argument- with which Kagan and Ginsburg and, to a lesser extent, Scalia agree- is that the Wynnes are receiving benefits at the county level such as schools, and fire and police protection and that they should pay their fair share for those services. At one point during the oral argument, Kennedy wondered whether the Wynnes were “getting a free ride” with respect to county services. The majority swept that argument away by stating that Maryland could overcome the problems by simply applying the credit to the county portion of the tax liability, and several other options offered.
For Maryland, the bottom line is that they will now have to alter their income tax law in order to overcome this loss in the Supreme Court. Obviously, they will have to make up the lost revenue also which both sides conceded could be substantial. In a practical sense, very few states use the same taxing scheme utilized in Maryland and now any state considering such a scheme is precluded. Regardless, had Maryland prevailed, Roberts wondered hypothetically during oral argument about the effect on interstate commerce if many other states adopted a similar scheme. Had they, in an effort to raise additional revenue, one can clearly see the bad effects this would have on interstate commerce. There would be no incentive- or little incentive- to conduct business across state lines if you were going to be double taxed on the same income.
Leaving aside the voting alignment, this case will be analyzed and cited in future court challenges to state taxing schemes. One argument was that the Wynnes and others like them would be reaping benefits without paying for them. They leave out that the fact that they did pay a state income tax, that some of it went to Howard County, that they pay property taxes within Howard County which helps for county services and that some of their federal income tax filters back down to the county level. The “free ride” argument is without merit in today’s over-taxed society.