Wynne Income Tax Case Has Severe Fiscal Consequences for Counties

As reported on Conduit Street yesterday, the US Supreme Court ruled in a 5-4 decision that Maryland’s income tax system, specifically the application of the local income tax, is unconstitutional and must be altered to grant more credits for Maryland residents’ out-of-state income. At issue in the case, Maryland State Comptroller of the Treasury v. Brian Wynne, was whether the failure to allow a credit against the county income tax violates the commerce clause because it discriminates against interstate commerce.

The decision, which divided the conservative members of the Court, will have severe fiscal consequences for local governments. As reported by the Washington Post,

The ruling affects about 55,000 Maryland taxpayers, according to the state comptroller’s office.

Those who tried to claim the credit on their county income tax returns between 2006 and 2014 are likely to be eligible for refunds, which officials estimate could total $200 million with interest.

Going forward, certain small-business owners who pay income taxes to another state on income earned in that state will be able to claim a credit for both the state and county portions of the Maryland tax, costing Maryland an estimated $42 million a year in revenue.

Many local governments had begun planning for the worst, but it will still strain their budgets. As reported by Baltimore Sun,

Officials in Baltimore established a $4.2 million reserve early in the litigation to cover the estimated cost of reimbursing city taxpayers. Going forward, officials expect to lose about $1.4 million in revenue annually.

“This decision will obviously cost the city some revenue which will require some difficult choices be made down the road,” said Kevin Harris a spokesman for Baltimore Mayor Stephanie Rawlings-Blake. “However, the mayor thought it was important that the city be proactive and plan ahead [and] funds were set aside to cover potential loss of revenue.”

Montgomery County will take the largest hit, according to estimates from the comptroller’s office and county officials, at just over $24 million per year — more than half the statewide total.

When the cost of reimbursing taxpayers is added to lost revenue, Montgomery County Executive Isiah “Ike” Leggett said Monday, the impact in fiscal year 2017 could exceed $50 million.

The next largest (annual) losses would fall in Baltimore County, at $4.5 million, and Anne Arundel County, at $3.6 million, according to state estimates.

A spokeswoman for Baltimore County described it as “a significant cut” that would “necessitate some difficult choices in the future.”

For more details on the case, see previous Conduit Street coverage:

Maryland Loses Wynne Income Tax Case – Counties Brace for Impact
With Income Tax Case Looming, State Adopts Follow-Through Plan
Wynne Income Tax Case Provokes Conversation and Questions at Supreme Court
U.S. Solicitor General Backs Maryland In Local Income Tax Case
Supreme Court Demonstrates Interest in County Income Tax

Full coverage of the case, including all legal documents and filings, is available at the SCOTUSblog website.