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Maryland Unfairly Double Taxes|Out-of-State Income, Supreme Court Finds

(CN) - A Maryland tax law that effectively double taxes residents for income earned in other states is unconstitutional, a divided Supreme Court ruled Monday.

The 5-4 ruling is expected to have significant implications for more than 5,000 taxing jurisdictions across the country, including the states of New York, Pennsylvania and Indiana, and the cities of Detroit, St. Louis and Kansas City.

That's because all of these jurisdictions have tax regimes that are similar to the one the high court majority struck down.

Maryland allows residents to deduct income taxes paid to other states from their state tax, but it doesn't apply that deduction to a local tax it collects on behalf of some cities and towns. State officials argued the distinction was necessary to ensure that residents pay their fair share for local government services and schools.

But Maryland residents Brian and Karen Wynne challenged the law, claiming it unfairly prevented them from deducting $84,550 they paid in income taxes to 39 other states.

Brian Wynne, part- owner of a national health care company, argued the Maryland law taxed he and his wife on income that had no connection whatsoever to the state.

Maryland's highest court ruled in the Wynne's favor in 2013, holding that the state tax regime violated the Commerce Clause of the U.S. Constitution.

Writing for the majority, Justice Samuel Alito agreed with that assessment, observing that "the near-universal state practice is to provide credits against personal income taxes for such taxes paid to other states."

Justice Ruth Bader Ginsberg wrote a dissent in which she was joined by Justices Elena Kagan and Antonin Scalia. Justice Clarence Thomas penned a separate dissent, which Scalia joined in part.

"This case is, at bottom, about policy choices," Justice Ginsburg wrote. "Should states prioritize ensuring that all who live or work within the State shoulder their fare share of the costs of government? Or must States prioritize avoidance of double taxation?"

Ginsburg said achieving even the latter goal is beyond the competence of the Supreme Court, and "[r]esolving the competing tax policy considerations this case implicates is something the Court is even less well equipped to do.

"For century, we have recognized that state legislatures and the Congress are constitutionally assigned and institutionally better equipped to balance such issues," Ginsberg wrote.

Justice Thomas's objection was based on his belief that the court's "negative Commerce Clause jurisprudence" has departed dramatically from the actual Commerce Clause."

"According to the majority, a state income tax that failed to provide residents with 'a full credit against the income taxes that they pay to other States' violates the Commerce Clause ... That news would have come as a surprise to those who penned and ratified the Constitution," he wrote.

Maryland officials had previously said that if the U.S. Supreme Court ruled against them, it could cost local governments throughout the state as much as $50 million, and result in the refund of some $120 million in previously collected taxes.

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