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The third case in my series is a Constitutional decision under the “dormant Commerce Clause,” involving state income taxation called Comptroller of the Treasury of Maryland v. Wynne. It is interesting because: (1) it limits the right of states to tax individual income, and (2) it generated an unusual 5-4 split, dividing both the conservative and liberal justices 2-2, with Justice Kennedy casting the deciding vote.
Whether the Commerce Clause of the federal Constitution prohibits a state from imposing an income tax system that results in a higher tax burden on out-of-state income.
A legal doctrine called the “dormant Commerce Clause,” originating in an early SCOTUS decision called Gibbons v. Ogden (1824), generally prohibits state laws that substantially burden interstate commerce. The rationale for the doctrine is that the Constitution reserves to Congress the power to regulate “interstate commerce,” and therefore states cannot intrude in this area. There are relatively narrow exceptions addressed in other cases.
The Wynne case involved a county income tax, administered by the state of Maryland. Both the state and county income tax laws imposed a tax on the worldwide income of a Maryland resident. Unlike the state income tax, the county income tax did not provide a credit for income tax paid on earnings made in another states.
A married couple residing in Maryland, the Wynnes, had earned income in 39 states and evidently paid income taxes in some of those states. In accordance with Maryland law, the Comptroller of the Treasury of Maryland, denied them a credit for income taxes paid to other states in the calculation of their Maryland county income tax.
III. Opinion of the Court
Alito wrote the opinion of the Court, joined by Chief Justice Roberts, as well as Associate Justices Kennedy, Breyer and Sotomayor The majority opinion viewed the case as a straightforward application of the principles set forth in prior cases, though never before applied to an individual resident of a state. Prior cases had invalidated “discriminatory” income tax laws applied to corporations.
The fundamental idea is that if a state imposed a variety of gross receipts and net income taxes on interstate income only, that would be essentially equivalent to a tariff. If there is anything that the “dormant Commerce Clause” prevents, it is the imposition of a tariff by one state on goods or services imported from another state.
First, the majority rejected the proposition that a state has the right to tax the worldwide income of its resident, without regard to whether its scheme imposes a higher tax on income earned out-of-state.
Next, the majority applied the “internal consistency test” to determine whether the Maryland county income tax improperly burdened interstate commerce. This test assumes that all states have the same income tax system as the challenged state. Under this assumption, if the total tax on out-of-state (interstate) income would be higher than the total tax on in-state (intrastate) income, then the tax system violates the dormant Commerce Clause.
This more complex test is necessary because different states are permitted to impose different income tax systems (or none at all). But the tax system of each state is not permitted to impose a greater burden on income earned out-of-state.
There are two principal ways that a state can comply with this requirement: (1) it can offer residents a credit for income tax paid to other states, or (2) it can tax intrastate income only. There may be other permissible systems, but these are the two that are commonly used among the states.
IV. Dissenting Opinions
Ginsburg wrote the principal dissent, joined by Scalia and Kagan. Ginsburg relied on prior decisions stating, in dictum,* that a state could tax the income of its residents as it chooses.
In addition, Ginsburg viewed the problem as being created not by Maryland alone, but by the other state(s) involved, and found it improper to blame the Maryland tax system. She pointed out, for example, that the problem presented — that the Wynnes had to pay higher tax on their interstate income — could also be solved if the non-resident state(s) offered a credit for their payment of the Maryland county income tax. Thus, Ginsburg’s dissent rejected the “internal consistency” test.
In addition to joining Ginsburg’s dissent, Scalia dissented separately to criticize the “dormant Commerce Clause” generally, explaining that he would maintain the doctrine under the principle of stare decisis,** but would only use it to invalidate state taxes systems indistinguishable from those previously invalidated.
Thomas dissented separately, expressing his opinion that the entirety of “dormant Commerce Clause” jurisprudence is improper and should be overturned.
Notes on this section:
* “Dictum” is a statement made in a prior decision that was not necessary to the determination of the prior case. Dictum is generally treated as not binding in future SCOTUS decisions.
** “Stare decisis” is the legal doctrine of upholding prior precedent, even if the deciding court (or judge) disagrees. It comes from a Latin phrase “stare decisis et non quieta movere” meaning “to stand by decisions and not disturb the undisturbed.”
I found this case interesting primarily due to the unusual split between the justices. The majority opinion carried two of the conservatives (Roberts and Alito), two of the liberals (Breyer and Sotomayor), and the “swing” justice (Kennedy).
The dissenters were also split, with two conservatives (Scalia and Thomas) and two liberal (Ginsburg and Kagan).
Overall, the outcome is good from a “conservative” standpoint, as it imposes a limit on state income taxation. Note, however, that the Justices did not simply follow what one might assume would be their “ideological” interest — i.e. two conservative Republican appointees voted in favor of the state tax system, and two liberal Democratic appointees voted to overturn the state tax system.
Another interesting point is that this case was an appeal to SCOTUS from the highest court of Maryland (called the “Court of Appeals of Maryland” — most states use the phrase “supreme court” in the name of their highest court, but a few use “court of appeals” including Maryland and New York). Most SCOTUS cases are appeals from lower federal courts, but SCOTUS has jurisdiction over appeals from the highest court in a state when the appeal raises a question of federal law.
In this case, both the Court of Appeals of Maryland and the Maryland intermediate appellate court reached the same decision as SCOTUS, invalidating the county income tax in the absence of a credit.