With Income Tax Case Looming, State Adopts Follow-Through Plan

Local governments are anxiously waiting for a decision from the U.S. Supreme Court, which will determine whether local jurisdictions owe approximately $200 million in refunds to Maryland taxpayers. At issue in the case, Maryland State Comptroller of the Treasury v. Brian Wynne, is whether the failure to allow a credit against the county income tax violates the commerce clause because it discriminates against interstate commerce.

A Washington Post article describes the effects of the case if the U.S. Supreme Court rules for either side.

If the Supreme Court reverses the Maryland Court of Appeals — deciding that states are not required to offer the full credit — it could send ripples through the tax systems in the more than 40 states that do. Legislatures scuffling to balance their budgets might view reducing or eliminating the credit as an attractive option.

But if the lower court ruling is upheld, Maryland and its localities would take a one-two fiscal punch. They would owe an estimated $200 million in refunds and interest to taxpayers who, like the Wynnes, also filed claims in the past seven years for a credit on their county taxes. Going forward, the state probably would have to change its tax code to begin offering the credit against the county tax, producing a loss of about $42 million a year in revenue, according to estimates by the state comptroller’s office.

Should the lower court ruling be upheld, budget conferees included and the full General Assembly adopted language in HB 72, The Budget Reconciliation and Financing Act of 2015 (BRFA) to specify how the credit against the local income tax would be applied and how the refunds would be paid contingent on the outcome of the case.

MACo has been working closely with General Assembly leaders and the Comptroller’s Office on these issues for almost two years, and supports the language drafted by the Comptroller’s Office that is now included in the BRFA. In the application of the credit, it would be applied first to the state income tax and any remaining credit to the local income tax consistent with the first set of refund estimates received from the Comptroller’s Office.

According to the BRFA language, the refunds would be paid from the Local Income Tax Reserve Account with counties and municipalities reimbursing the account from quarterly income tax distributions in 9 equal installments. The reimbursements would not begin before June 2016. One reimbursement would occur in FY 2016, with 4 reimbursements in each of the next two fiscal years, FY 2017 and FY 2018.

For more information on this case, Maryland State Comptroller of the Treasury v. Brian Wynne, see prior posts on Conduit Street.