ANNAPOLIS, Md. (AP) — Although a U.S. Supreme Court ruling striking down a Maryland tax could affect similar laws in nearly 5,000 local jurisdictions in other states, the brunt of Monday’s decision will fall on one county.
With about 1 million people, Montgomery County is the state’s most populous. The affluent suburb of the nation’s capital has a $5 billion budget and a high number of residents whose income is taxed by other states.
The court ruled it is unconstitutional for Maryland to in effect double-tax income residents earn in other states. The state allowed residents to deduct income taxes paid to other states from their Maryland tax but did not apply the deduction to a local “piggyback” tax collected for counties and some city governments.
The case is expected to cost an estimated $200 million in refunds stretching back seven or eight years. The state will cover the expense with a reserve fund set aside to pay tax refunds, though local governments will pay the money back on an installment plan stretching more than two years.
“It’s going to be a serious challenge, particularly for counties where there’s a lot of folks with earned income that’s taxed by other states,” said Del. Bill Frick, a Montgomery County Democrat in the Maryland House of Delegates.
Montgomery County Executive Isiah Leggett wrote in a letter Monday that the specific fiscal impact of the decision is not known, because officials do not have information on refund claims for tax years 2012-2014. Leggett wrote that the county expects an impact of between $8 million and $10 million in fiscal year 2016, which begins July 1. The impact on the county in fiscal year 2017 is expected to be more than $50 million, Leggett added.
Montgomery also stands to lose about $24 million a year in annual tax revenue.
Maryland officials have been bracing for the bad news. The state’s highest court ruled against the tax in 2013. The justices agreed that the tax is invalid because it discourages Maryland residents from earning money outside the state.
The unusual split in the 5-4 decision wasn’t along ideological lines. Writing for the court, Justice Samuel Alito said the tax “is inherently discriminatory” under the Constitution’s Commerce Clause. The court has interpreted that provision to ban states from passing laws that burden interstate commerce.
Alito was joined by Chief Justice John Roberts and Justices Anthony Kennedy, Stephen Breyer and Sonia Sotomayor.
In dissent, Justice Ruth Bader Ginsburg said nothing in the Constitution requires a state to avoid taxing its residents just because another state has a similar tax regime targeting the same income. She was joined in dissent by Justices Antonin Scalia and Elena Kagan. Justice Clarence Thomas wrote separately to say the Commerce Clause cannot be used to strike down a state law.
Although the split was unusual, the ultimate outcome was not unexpected in Maryland. George Leventhal, president of the Montgomery County Council, noted that the court’s decision, though unwelcome, wasn’t a surprise.
“We’ll monitor the demands on the budget, and if it’s necessary to engage in a mid-year savings plan … then we’ll take that up, if it’s necessary,” Leventhal said.
Leventhal also said the decision could build pressure for a property tax increase.
Although the brunt of the impact will fall on Montgomery County, some smaller Maryland counties near the Delaware border, such as Cecil County, also will be affected because of the number of residents who work in neighboring Delaware.
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 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.
(Copyright 2015 by The Associated Press. All Rights Reserved.)