Tax-happy Maryland faces the Supreme Court

Last week, the U.S. Supreme Court considered whether it’s illegal double taxation to tax income someone earned and paid taxes on in another state. That’s what happened to Maryland residents Brian and Karen Wynne.

“This is a problem that only Maryland has,” the Wynnes’ lawyer, Dominic Perrella, said. The Wynnes earned income from their share in a home-care company doing business in dozens of states. They paid taxes in those states, and then claimed a credit in their home state of Maryland. But Maryland said no.

Solicitor General William Brockman argued residents should pay full taxes on all income in Maryland, whether they earned it there or not, because they enjoy the full benefits of state services.

“You don’t get 18 percent of a firetruck or a day of school because you earned 82 percent elsewhere,” Brockman said. “You get 100 percent, just like your neighbor does.”

The stakes are high for Maryland counties, which stand to lose millions in revenue if the court rules for the Wynnes. But Justice Samuel Alito worried about discouraging interstate commerce.

“What you’ve done operates exactly like a tariff because it provides an incentive to earn income in Maryland and not outside of Maryland,” Alito said.

Brockman argued Maryland’s tax system is its own business, and how other states handle the question is of no concern to it.

“You’re on the principle that life is not fair, right?” Justice Antonin Scalia asked.

“Life is not fair. Maryland taxes are,” Brockman replied.

A little later, Justice Stephen Breyer asked whether it would be constitutional to require someone who lives in California and owns a Hawaiian hot dog stand to pay both state’s tax on income. Brock said it was.

“Move to Hawaii is what you’re saying,” Scalia quipped to laughter in the courtroom. “And a lot of people do that, for tax reasons. … A lot are moving out of Maryland, too.”

The Obama administration, state, and local governments support Maryland’s position, saying the Wynnes read the Commerce Clause wrongly. That clause plainly denies the power to burden interstate commerce. But the government entities want no judicial interference with their taxation powers.

Two other arguments last week dealt with the way courts interpret statutes and contracts. They were highly technical arguments about small points of law. But out of them came a blunt warning from Scalia about contracts that are poorly written and what the losers who signed them should expect from the court: “The nice thing about a contract case of this sort is you can’t feel bad about it. Whoever loses deserves to lose. I mean, this is obviously an important feature. Both sides knew it was left unaddressed, so whoever loses deserves to lose for casting this upon us when it could have been said very clearly in the contract. Such an important feature. So I hope we’ll get it right, but, you know, I can’t feel bad about it.”