Maryland residents are getting pinched.

Photographer: Mark Wilson/Getty Images

Supreme Court's Chance to Cut Taxes

Noah Feldman is a Bloomberg View columnist. He is a professor of constitutional and international law at Harvard University and was a clerk to U.S. Supreme Court Justice David Souter. His books include “Cool War: The Future of Global Competition” and “Divided by God: America’s Church-State Problem -- and What We Should Do About It.”
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Do you earn any money outside your state? Whether you’re an NBA player or a lowly lecturer-consultant like some of us, you know the drill: Pay income tax where you earned the money, then get a credit from your home state when you file your return.

Unless, that is, you live in Maryland. Maryland refuses to credit residents for part of the money they earn elsewhere, choosing instead to double-tax them. The U.S. Supreme Court now has to decide whether this is constitutional. Depending on the outcome, copycats probably won’t be far behind.

The key to the case being argued today, which goes under the banal-sounding name of Comptroller v. Wynne, is a constitutional doctrine that has struck fear in the hearts of generations of law students. It’s called the dormant commerce clause, not because it puts you to sleep but because it regulates something different from and, in a sense, more passive than ordinary commerce clause jurisprudence.

The commerce clause is the constitutional provision that gives Congress the right to regulate interstate commerce. As clauses go, the commerce clause gets a fair amount of press. It was at the heart of the first challenge to the Affordable Care Act, when challengers (and four justices) claimed that the regulation of commerce didn’t include making people buy health insurance. Historically, the commerce power has been extended widely along with our definition of economic effect. Even the Civil Rights Act of 1963 was justified in part on the basis of the commerce power.

The dormant commerce clause doctrine is much less known. It is, if you will, an inference from the structure of Congress’s power to regulate interstate commerce: The states themselves may not burden or discriminate against that commerce.

At the core of the dormant commerce clause is an ideal of free trade among the states. Imagine the U.S. as the European Union and the dormant commerce clause as the Maastricht Treaty. Among the troubles of the U.S. under the Articles of Confederation was a tendency by states to engage in behavior intended to provide economic advantages to their own industries and residents over those of other states. Dormant commerce clause doctrine is supposed to block that possibility, creating a level playing field and the possibility of economic union.

Maryland divides its state income tax into two components, one statewide and one at the county level. The statewide tax system allows residents to get credit for any taxes collected by other states for income earned there. The county component does not. Maryland argues that this system is perfectly legitimate. The state, Maryland claims, possesses a special relationship with its residents, providing them distinctive services. If it chooses not to credit them for taxes paid elsewhere, it is within its rights.

Maryland’s highest state court disagreed. It held that Maryland’s tax system discriminated against out-of-state income, and thereby created a disincentive to earn such income. The disincentive effectively discourage interstate commerce compared with commerce that occurred entirely within the state, and therefore violated the dormant commerce clause.

Here’s where things get interesting. On the surface, it seems obvious that double taxation on income earned out of state burdens interstate commerce. Logically, the tax should violate the dormant commerce clause because it operates as a barrier to national economic unity.

But whose fault is that? Maryland, with an assist from the U.S. appearing as friend of the court, points out plausibly that the other state that taxes income earned by Maryland residents within its jurisdiction is burdening interstate commerce as much or more than Maryland is.

Well-established precedent says that states can tax their own residents to their hearts’ content. And after all, Maryland says, it has a closer relationship with its residents than the other states where they happen to have earned some money.

What’s more, it’s common for income earned out-of-state to be taxed at a higher rate than income earned in state -- if, for example, the state where you earn the money has a higher income tax than the state where you live. It follows, says Maryland and the federal government, that there’s nothing wrong with a higher total tax rate on income earned elsewhere.

So who’s right? The first part of an answer is to recognize that all differential tax burdens among states distort the goal of national economic unity. In a perfectly unified economy, states wouldn’t be able to compete with one another for residents and business by offering better tax rates. But this vision of economic unity is too absolute. Competition among states may actually keep tax burdens within reason -- and anyway, U.S. federalism assumes the residents of different states may actually have different beliefs about how much tax to charge.

If we’re going to allow differential taxation, what is so different about double taxation? Here the law’s challengers are onto something. True, it’s not Maryland alone that’s discriminating against interstate economic activity through double taxation -- but Maryland is 50 percent responsible. The other 50 percent of responsibility lies with the other state.

The Supreme Court should therefore strike down the practice of double taxation because it distorts economic activity in a way that’s different from differential taxes imposed by different states. Maryland residents doing business out of state are uniquely burdened with higher tax rates than they would pay for in-state activity. They also pay more taxes for the same work compared with residents of the state where the income is earned (not to mention residents of every other state that doesn’t double tax).

Saying so doesn’t answer the question of who should have to stand down, Maryland or the other states? In theory, it might be plausible to block those states from taxing income earned there by Maryland residents, rather than banning Maryland from refusing to credit taxes paid elsewhere by its own residents. But sometimes practice is much stronger than theory. In practical terms, it should matter that only Maryland has adopted this practice of double taxation. The practice of taxing income earned by out-of-state residents is essentially universal. Like the norm of driving on the right side of the road, this is a convention -- but it’s a convention that’s necessary to avoid double taxation. The Supreme Court would therefore be justified in banning Maryland -- or any other state -- from breaking the norm and imposing double taxation. The point is to be practical, and to fulfill the intentions of national economic unity that helped make the U.S. the economic power it is today.

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Noah Feldman at

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