From my AEI colleague Alan D. Viard:
On November 12th, the Supreme Court heard oral arguments in Maryland Comptroller v. Wynne, in which a Maryland couple, Brian and Karen Wynne, contend that their state's income tax treatment of income earned across state lines discriminates against interstate commerce. Like other states with income taxes, Maryland taxes residents on income earned both in and out of the state and also taxes nonresidents on income earned in the state. But, one aspect of Maryland's policy is uniquely severe. Other states offer residents a full credit for taxes they paid to other states on out-of-state income, up to the amount of tax they pay at home on that income. Maryland offers only a partial credit, forcing residents to pay some tax at home on out-of-state income, no matter how much they paid to the states in which they earned the income.
It can be tricky to predict the Court's decisions from the oral arguments. But, several Justices' comments and questions suggest that there may be a majority willing to uphold the Maryland tax system. They may even accept Maryland's sweeping argument, supported by the Obama administration, that states can stop offering any credits at all if they wish. That would spell trouble for the national economy, which depends on the free flow of labor and business income across state lines.
The day before the Court heard the case, Dr. Viard laid out the issue in an op-ed.
If the Court rules in Maryland's favor, it will pave the way for states to put heavier tax penalties on Americans who earn income across state lines, disrupting the free working of the open national economy on which our prosperity depends.
He and two other of my AEI colleagues, Kevin A. Hassett and Alex Brill, wrote an amicus brief outlining their thoughts in detail. In it, in the words of Viard, they urge "the Court to reject" the "dangerous position" held by Maryland and the Obama administration.
Maryland and the administration claim that states don't have to give any credits at all for taxes paid to other states. The way they see it, even Maryland's partial credit is a favor that the state legislature can take away any time it pleases.
Viard also held a conference at AEI on the subject, which you can watch here.
Will the Court get it right? Dr. Viard concludes:
It will probably be at least a few months before the Court decides the case. Right now, though, things don't look promising for neutral tax treatment of interstate income.
-- Michael R. Strain is a resident scholar and economist at the American Enterprise Institute. You can follow him on Twitter at twitter.com/MichaelRStrain.