Carroll residents who worked out of state the past few years may be eligible for refunds on taxes paid in other states, which is expected to cost the county government about $1 million in the short term, and several hundreds of thousands of dollars annually thereafter after the U.S. Supreme Court ruled Maryland's income tax law unconstitutional.
The 5-4 decision Monday declared Maryland's practice of not allowing residents to deduct what they paid in income taxes outside of the state from the county portion of the state's income tax a violation of the U.S. Constitution. Maryland does not apply the out of state tax deductions to the local "piggyback" income tax collected for counties by the state.
In future tax years, Carroll County residents who pay out-of-state income taxes will be able to apply those taxes as a credit against both the state and county portions of the income tax collected by Maryland.
The ruling will make residents who earned wages across state lines between 2006 and 2014 eligible for refunds, said Jim Peck, director of Research and Information Management for the Maryland Municipal League.
"Residents who earned wages out of state from 2012 and thereafter may file an amended tax return," Peck said. "Prior to 2012 residents are precluded from filing [an amended tax return] by statute of limitations unless taxpayers filed a protective claim with the state comptroller."
No one in Carroll submitted such a claim with the comptroller from 2007 through 2013, according to statistics compiled by the Comptroller of Maryland.
The state is estimating the decision could result in refunds totaling as much as $200 million.
Ted Zaleski, director of Carroll County government's Department of Management and Budget, said the county's total refund liability for 2006-2014 could be as much as $1 million and the decision will reduce the county's annual revenue in future years by several hundred thousand dollars.
"It might be $1 million [total in back taxes] or so, but we can't answer for sure until we find out who we actually owe money to," he said. "An estimate is to be made, but a lot needs to be figured out."
This decision will also impact municipalities to varying degrees, Peck said.
"From the county [portion of the state] tax, 17 percent of the tax generated within municipal corporate limits goes to municipalities," Peck said. "To the extent of the limits, some of the taxpayers have been paying income tax on out-of-state income, [which] could lead to impacts on municipalities."
Kelly Baldwin, director of finance for the Town of Manchester, and Tammi Ledley, town manager of Hampstead, both said they had only found out about the ruling Monday afternoon and have not had the time to determine how much of a financial impact this ruling could have on their municipalities. Staff at some other municipalities in the county could not be reached by 6 p.m. Monday for comment.
Peck said the state will be offering refunds to residents whose claims are validated, and this money will come from the state's income tax reserve fund.
"Local governments will then have the chance to pay these costs up front or reduce their quarterly income tax payments received from the state," Peck said.
Zaleski said it is too soon to say how Carroll County will choose to pay for these refunds or how it will affect the budget.
"It could be [considered] an expenditure [in the budget] or it could be a reduction in revenue," Zaleski said.
The Baltimore Sun contributed to this article.
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