Maryland's counties and Baltimore face a collective loss of more than $40 million a year and some taxpayers could get refunds if a decision by the state's highest court isn't reversed on appeal to the U.S. Supreme Court.
The state Court of Appeals ruled in January that Maryland must offer a credit to taxpayers with some types of out-of-state income to offset the local piggyback tax. Maryland Attorney General Douglas F. Gansler asked the court to reconsider that decision, but it rejected that request last week.
The state's high court stayed its ruling pending a possible appeal to the U.S. Supreme Court. David Paulson, a spokesman for Gansler, said Monday that the office has 90 days to file a petition with the Supreme Court asking it to hear an appeal. He said a decision would likely come well before that deadline.
Andrea Mansfield, legislative director of the Maryland Association of Counties, said the organization hopes Gansler takes the case to the high court.
"There will be a fiscal impact on our Maryland counties," Mansfield said. "It's a big hit."
The case disproportionately affects Montgomery County, which has a high percentage of wealthy residents. They are more likely to collect income from multiple states than the typical taxpayer.
The suit was brought by Brian and Karen Wynne of Howard County against the comptroller's office over a ruling that they were ineligible for a credit against their county income tax on their 2006 Maryland return.
The Court of Appeals found that Maryland's failure to provide such a credit violates the Commerce Clause of the U.S. Constitution. By a 5-2 majority, the court ordered the state to recalculate the Wynnes' tax liability — and by extension that of other taxpayers — allowing for such a credit.
If the ruling stands, counties could have to issue refunds to taxpayers who file amended returns. In a filing with the court, the attorney general's office estimated that such refunds could cost local jurisdictions more than $130 million for the three years 2009-2011.
Montgomery County would absorb more than half of the statewide impact, according to an estimate provided by Andrew Schaufele, director of the state Bureau of Revenue Estimates. For 2011, according to a projection Schaufele filed with the state court, Montgomery would lose $24 million. Other counties would lose a combined $19 million for that year.
Montgomery's expected revenue loss — 2.1 percent of its piggyback tax revenue — reflects the relative wealth of its residents. Affluent taxpayers are more likely than others to earn money generated in other states through S corporations, the source of the income that was the subject of the Wynne lawsuit.
Baltimore County would feel the second-largest impact in dollar terms, losing about $4.5 million in 2011, or 0.9 percent of piggyback revenue, according to the estimate. Baltimore would lose $1.4 million, or 0.6 percent. In some rural counties, the impact would be less than $100,000 a year.
Maryland Policy & Politics
The case involves income earned by the Wynnes through an S corporation, which under federal tax law passes its income and losses directly to its shareholders. Under Maryland law, taxpayers receive a state income tax credit to offset out-of-state income earned through a S corporation and for which taxes have been paid in another state. However, the state does not offer a credit for the local "piggyback" part of the income tax, which ranges from 1.2 percent to 3.2 percent depending on the county.
The Court of Appeals ruled that the county tax is, in effect, an extension of the state tax. By denying a credit for the local portion, the court ruled, the state imposes a higher level of taxation on income earned outside Maryland than it does for income generated in the state.
That violates a "dormant," or implied, provision of the U.S. Constitution that seeks to put interstate commerce on an equal footing with in-state business, according to the opinion written by Judge Robert J. McDonald.
"In effect, it acts as an extra tax on interstate income earning activities," the ruling said.
In dissent, Judge Clayton Greene Jr. found no undue burden to interstate commerce.
"The Wynnes may believe that it is bad policy to require them to pay the Howard County tax without a tax credit, however, they have failed to prove that it is violation of the dormant Commerce clause," Greene wrote.