The U.S. Supreme Court Should Reverse Wynne – Narrowly
Maryland State Comptroller of the Treasury v. Brian Wynne requires the Supreme Court to decide whether the U.S. Constitution compels a state to grant an income tax credit to its residents for the out-of-state income taxes those residents pay on out-of-state income.
Brian and Karen Wynne live in Howard County, Maryland. As Maryland residents, the Wynnes pay state and county income taxes on their worldwide income. Maryland law provides that its residents who pay income taxes to states in which they do not live may credit those payments against their Maryland state income tax liability. However, Maryland grants no equivalent credit under the county income tax for out-of-state taxes owed by Maryland residents on income earned outside of Maryland.
When the Wynnes complained about the absence of a credit against their Howard County income tax for the out-of-state income taxes they paid, Maryland’s Court of Appeals agreed, holding that such credits are required by the nondiscrimination principle of the Constitution’s dormant Commerce Clause. The absence of a credit against the county income tax induces Maryland residents like the Wynnes to invest and work in-state rather than out-of-state. This incentive, the Maryland court held, may impermissibly “affect the interstate market for capital and business investment.”
For two reasons, the U.S. Supreme Court should reverse. First, Wynne highlights the fundamental incoherence of the dormant Commerce Clause test of tax nondiscrimination: Any tax provision can be transformed into an economically equivalent direct expenditure. No principled line can be drawn between those tax provisions which are deemed to discriminate against interstate commerce and those which do not. All taxes and government programs can incent residents to invest at home rather than invest out-of-state. It is arbitrary to label only some taxes and public programs as discriminating against interstate commerce.
Suppose, for example, that Howard County seeks to improve its public schools, its police services, or its roads. No court or commentator suggests that this kind of routine public improvement violates the dormant Commerce Clause principle of nondiscrimination. However, such direct public expenditures, if successful, have precisely the effect on residents and interstate commerce for which the Court of Appeals condemned the Maryland county income tax as discriminating against interstate commerce: Better public services also “may affect the interstate market for capital and business investment” by encouraging current residents and businesses to stay and by attracting new residents and businesses to come.
There is no principled basis for labeling as discriminatory under the dormant Commerce Clause equivalent tax policies because they affect “the interstate market” of households and businesses. Direct government outlays have the same effects as do taxes on the choice between in-state and out-of-state activity. If taxes discriminate against interstate commerce because they encourage in-state enterprise, so do direct government expenditures which make the state more attractive and thereby stimulate in-state activity.
Second, the political process concerns advanced both by the Wynne dissenters in Maryland’s Court of Appeals and by the U.S. Solicitor General are persuasive. Mr. and Mrs. Wynne are Maryland residents who, as voters, have a voice in Maryland’s political process. This contrasts with nonresidents and so-called “statutory residents,” individuals who are deemed for state income tax purposes to be residents of a second state in which they do not vote. As nonvoters, nonresidents and statutory residents lack political voice when they are taxed by states in which they do not vote.
Nonresidents and statutory residents require protection under the dormant Commerce Clause since politicians find it irresistible to export tax obligations onto nonvoters. The Wynnes, on the other hand, are residents of a single state and vote for those who impose Maryland’s state and local taxes on them.
In reversing Wynne, the Supreme Court should craft a narrow holding. The Wynnes, as residents of a single state, should not receive constitutional protection for their claim to a county income tax credit for the out-of-state taxes they pay. However, the Court’s decision should not foreclose the Court from ruling, down the road, that credits are required to prevent the double income taxation of individuals who, for income tax purposes, are residents of two or more states. Such dual residents lack the vote in one of the states taxing them and thus require constitutional succor which the Wynnes do not.
Dissenting in Cory v. White, Justice Powell (joined by Justices Marshall and Stevens) argued “that multiple taxation on the basis of domicile” is unconstitutional. Since the Wynnes are taxed by only one state, the Supreme Court need not now confront this issue again. However, the Court should decide Wynne in a fashion which allows the Court to revisit this question in the future by holding that credits are constitutionally required to prevent the double taxation of dual residents.
This is a guest post from Edward A. Zelinsky. Professor Zelinsky teaches at Cardozo Law School. He is the author of The Origins of the Ownership Society (Oxford, 2007) and his articles have appeared in many publications including the Harvard Law Review, Yale Law Journal, Columbia Law Review, Virginia Tax Review, Cardozo Law Review, Tax Notes and State Tax Notes.