Maryland’s income tax system has been challenged and ruled as unconstitutional by the U.S. Supreme Court. The reason was that Maryland’s tax policy essentially double-taxed its residents for income earned in other states. According to Forbes, the Maryland policy was operating as a tariff, since dollars earned and taxed outside of the state’s borders were then being taxed again within the state.
The tax policy violated a “dormant Commerce Clause,” which is a doctrine that permits courts to strike down laws that hinder interstate commerce. By double-taxing its residents on their out-of-state earned income, the Supreme Court felt the state was discouraging interstate business.
“Maryland’s tax policy discouraged interstate commerce.”
While Justices Antonin Scalia, Clarence Thomas, Ruth Bader Ginsburg and Elena Kagan said striking down the Commerce Clause was usurping the state’s authority to establish its own tax policy, it wasn’t enough the stop the ruling of 5-4.
The decision will prevent Maryland from taxing its residents on their income without providing a credit for out-of-state taxes they have already paid. Additionally, the state will no longer be able to tax out-of-state workers on their income earned in Maryland. In most states, this is not an issue, so the repercussions won’t so much force other states to change their policy as to be aware of the ruling going forward, preventing them from implementing double-taxation schemes of their own.
While the state defended its tax policy, it noted that voters had the opportunity to change this during voting season. However, the Supreme Court indicated this was not a political reality.
According to the official ruling, “The notion that the victims of such discrimination have a complete remedy at the polls is fanciful. It is likely that only a distinct minority of a State’s residents earns income out of State. Schemes that discriminate against income earned in other states may be attractive to legislators and a majority of their constituents for precisely this reason. … In short, petitioner’s argument would leave no security where the majority of voters prefer protectionalism at the expense of the few who earn income interstate.”
What does this mean for Maryland?
Citizens of Maryland will now be entitled to receive tax credits for income earned in other states, which will shift tax compliance in the state. Additionally, the state of Maryland will now be required to pay back roughly $200 million to those residents who claimed a credit between 2006 and 2014, as noted by The Washington Post. In the future, Maryland will see about $42 million less in tax revenues each year because of the new ruling.
What does this mean for residents?
Those residents who earn income outside the state are likely to have big smiles as they will be keeping more money each year. However, it is important for residents to keep abreast of policy changes and shifts in tax compliance laws to avoid paying more, or even less, income tax than is required.
