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Groups back challenge to piggyback-tax ruling

Saying localities need the money, a Bethesda-based municipal lawyers’ group is urging the U.S. Supreme Court to save a law that bars Maryland residents from deducting, from city or county taxes, the tax they pay to other states when they earn money there.

The International Municipal Lawyers Association has filed a brief supporting Maryland Attorney General Douglas F. Gansler’s request that the justices overturn a January decision by the state’s top court, which held that the tax law violates the U.S. Constitution’s Commerce Clause by discouraging Marylanders from earning money outside the state.

The Maryland Association of Counties has joined IMLA’s friend-of-the-court brief, as did the U.S. Conference of Mayors and the National Association of Counties.

Gansler, in his Supreme Court petition filed last month, said the Maryland Court of Appeals’ decision could cost the state’s local governments between $45 million and $50 million annually.

In its brief, IMLA said that if the decision is allowed to stand, “each of Maryland’s counties and Baltimore City will experience significant reductions in personal income tax collections and be hindered in the ability to provide critical public infrastructure and services to residents such as schools, roads, police, parks, and libraries, to name only a few.”

Local jurisdictions in other states with similar laws would also suffer, IMLA added.

“The implications of the Maryland Court of Appeals’ ruling for many of those municipalities is dire: If every state is required to accord its residents a dollar for dollar credit for all income taxes paid to out-of-state recipients … the flow of funds to in-state municipalities will be vastly curtailed,” IMLA stated in the brief signed by Erich R. Eiselt, the group’s assistant general counsel.

“There are many states with long-established tax programs that, like Maryland’s, do not afford dollar-for-dollar credits to residents for all out-of state income taxes paid and are operating on a premise of constitutional viability,” the brief says.

Attorney Christopher T. Handman, who challenged the law on behalf of Howard County taxpayers Brian and Karen Wynne, said he will file papers with the Supreme Court by a Dec. 18 deadline urging the justices not to hear the state’s appeal.

Handman declined further comment Thursday.

In October, after Gansler filed his petition with the Supreme Court, Handman said that “we think the Maryland Court of Appeals got the constitutional issues exactly right.” Handman is with Hogan Lovells US LLP in Washington, D.C.

In its 5-2 decision in Maryland State Comptroller v. Wynne, the Court of Appeals said Maryland’s prohibition on deducting income earned out of state is a regulation on interstate commerce — a power the Constitution gives only to the U.S. Congress, the court said.

The Court of Appeals has stayed its decision pending action by the Supreme Court.

The case addresses an area of constitutional law known as the “dormant” Commerce Clause, which involves an alleged state infringement on the free flow of interstate commerce.

The IMLA brief stated the Supreme Court has cited the dormant Commerce Clause in overturning state laws that discouraged out-of-state businesses from competing with in-state companies.

The justices have not cited the clause to overturn a state income-tax provision, IMLA added.

“This court should grant certiorari to settle what has become a murky area of the law pitting the decision of the Maryland Court of Appeals against decisions of courts in other states and resolve the important federal question of the extent to which the dormant Commerce Clause should chip away at the state’s most basic sovereign power: that of taxing its residents,” the brief says.

The Supreme Court has given no indication of when it will rule on Gansler’s request, which was filed Oct. 15.

At issue is Maryland Tax-Gen. Article Section 10-703(a), which allows state residents to deduct the income taxes they pay to other states from their Maryland tax. However, the state says the provision does not apply to the so-called “piggyback” tax the state collects for local governments.

The local taxes for the current tax year range from a low of 1.25 percent of taxable income in Worcester County to a high of 3.2 percent in Baltimore city and Howard, Montgomery, Prince George’s and Queen Anne’s counties, according to the Maryland comptroller’s office.

Brian and Karen Wynne challenged the law after the comptroller said they could not deduct from their Howard County tax bill the $84,550 they paid in income taxes to other states in 2006.

The Wynnes’ out-of-state income was derived from Brian’s ownership share in Maxim Healthcare Services Inc., which operates nationwide.

The Maryland Tax Court ruled for the comptroller but was overturned in 2011 by a Howard County judge.

The Court of Appeals issued its opinion on Jan. 28.

Without the tax credit, “a taxpayer with income sources in more than one state will consistently owe more in combined state income taxes than a taxpayer with the same income sources in just the taxpayer’s home state,” Judge Robert N. McDonald wrote for the five-judge majority. “This may discourage Maryland residents from engaging in income-earning activity that touches other states.”

In dissent, Judge Clayton Greene Jr. said the state’s denial of an out-of-state tax credit for city and county taxes is not only constitutional but ensures fairness among neighbors, not all of whom might have earned income outside of Maryland.

“[I]f the taxpayers were allowed to pay a lesser amount of county income tax, it would have the possible absurd result of the taxpayers paying little or no local tax for services provided by the county while a neighbor with similar income, exemptions and deductions might be paying a substantial local tax to support those services,” Greene wrote.

Gansler’s petition is pending in Maryland Comptroller of the Treasury v. Wynne, No. 13-485.