OPINION:
Gov.-elect Larry Hogan wants to help Maryland grow by slashing taxes, but there’s a problem. He’s outnumbered. Any law the Republican chief executive vetoes can be sent back with the override of the supermajority of Democrats who retain their grip on Annapolis.
But Mr. Hogan may have more powerful allies than he expected. The U.S. Supreme Court last week heard arguments that the state’s personal income tax should be struck down as unconstitutional.
Curiously, given the imagination of lawyers, the high court has never before been asked to consider whether a state must not twice tax the income of residents.
Maryland, like other states with a personal income tax, gives credit, if, for example, a resident earns half of his income in Virginia and pays the appropriate amount of Virginia tax. Neither Virginia nor Maryland is entitled to impose and collect the full tax on the same resident.
But Maryland wants to get a cut of the money earned in other states by applying the county portion of the personal income tax to all personal income, regardless of where it is earned. While the state gives credit for taxes paid in other states on the Maryland state portion of the income tax, the same credit does not apply to the county portion of the tax.
Howard County residents Brian and Karen Wynne found that out the hard way. They own an S corporation, which means they pay the tax for their small enterprise on their personal tax forms. They were hit hard by the double tax and sought relief in the courts, and won.
The Maryland Court of Appeals, the state’s highest court, sympathized with their plight. The judges said that by taxing out-of-state income twice (and in-state income once), the state effectively favored in-state activity over out-of-state activity. This, they reasoned, violates what’s known as the “dormant Commerce Clause” of the Constitution — the inference that states can’t act in a way to disfavor activities originating in another state.
The Founders understood that states have a strong incentive to attach a tax to a product that passes through their borders, and that if the original 13 states each added their own tax, products would be priced beyond the ability or desire of anyone to pay. Interstate tariffs have always been struck down as unconstitutional.
Maryland officials couldn’t stand the thought of lost revenue, so they made a last-ditch appeal to the Supreme Court. They might not be pleased with the result.
“What you’ve done operates exactly like a tariff,” Justice Samuel A. Alito Jr. told the Maryland solicitor general, “because it provides an incentive to earn income in Maryland and not outside of Maryland … If you don’t dispute it as a factual matter, why shouldn’t this tax system meet exactly the same fate as a tariff?” Which is to say, be struck down as unconstitutional.
The reliably liberal Justice Stephen G. Breyer observed what happens when a state’s politicians seize every dime: “A lot [of people] are moving out of Maryland.”
Maryland’s taxman is collecting more than his fair share, and the people were so ready to right this wrong that they pulled the lever for Mr. Hogan, the candidate who promised to do his best to lower the tax and regulatory burden. The Supreme Court should lend the incoming governor a hand by delivering the first of what should be many tax cuts.
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