Monday, January 23, 2006

Six of One, Half-Dozen of the Other

The recent case of Comptroller v. Blanton illustrates ways in which statutes, merely by the manner in which they are drafted, can be applied in essentially inconsistent ways. It's first necessary to have some background concerning the Maryland income tax.

Not many years ago, the Maryland income tax was pretty much a straight 5% levy. At that time, the various counties had the ability to enact "piggy-back" income taxes of up to one-half of the Maryland income tax. The county taxes were collected by the state and remitted to the appropriate counties. Subsequently, the maximum Maryland tax rate was reduced to 4.75% and the counties were allowed to set their own rates up to an additional 3.2%.

Because other states impose income taxes on income earned within their borders, there is a provision that allows a credit to Maryland residents with respect to taxes imposed by other states on non-Maryland source income. The issue in Blanton was whether this credit was applicable only to the Maryland tax or whether it applied to any county piggy-back taxes as well. The Court of Appeals held that the tax credit applied only to the Maryland income tax. Thus, Maryland residents are subject to a maximum income tax at the combined rate of (i) the higher of either the state income tax in the state in which the income is earned and (ii) the Maryland piggy-back tax.

The result can be illustrated by assuming that a Maryland resident has income from a source in another state that is taxed by that other state at a 7.5% rate. That individual will be able to offset against his or her Maryland tax an amount equal to 4.75% of the income derived from the other state. However, because the non-Maryland tax cannot be offset against the county piggy-back tax, in many cases, the total tax rate can be 10.7%, higher than the rate imposed by either state.

However, the result with respect to Maryland income of non-Maryland residents is quite different. The Maryland income tax applies to all Maryland income of non-residents and to all income of residents. However, the county piggy-back taxes apply only to the income of the residents of the respective counties. Thus, if a non-resident has Maryland income, he or she only pays the Maryland tax, not a county piggy-back tax. In most cases, the non-Maryland resident will be allowed a credit in his or her home state in an amount equal to the Maryland tax paid. While if the domicile of the taxpayer is Florida or one of the other states without personal income tax, the maximum tax imposed on the income is 4.75%, the virtually every other case the maximum rate of tax will not exceed the greater of the maximum Maryland tax rate or the maximum tax rate imposed in the taxpayer's state of domicile.

The manner in which the statute and the credit provision is structured results in Maryland residents being potentially subjected to higher rates of tax from income earned in other states, while residents of those other states pay a lower rate of taxes on Maryland source income. In fact, in some cases (e.g., where the taxpayer is a resident of Florida), the tax rate will be substantially lower on Maryland income earned by non-Maryland residents than on Maryland residents.

The decision in Blanton, as a matter of statutory construction, is clearly correct. However, it leads to a result that puts Maryland residents at a disadvantage. The irony is that the tax scheme does not need to lead to an anomalous result. There's an easy fix.

All that is necessary is for the Maryland tax to be restructured to provide that the tax rate is 7.95%. Each county could be allowed to enact a piggy-back tax of up to 3.2%. The county tax would be a credit against the state tax. Non-Maryland residents who have Maryland income would pay a tax of 7.95% on their Maryland source income, since they would pay no county tax, they would not be able to use the "county tax credit." Maryland residents would pay tax at the rate of no more than the 7.95%, which is either what most are either paying now or close to it.

On the other hand, Maryland residents would be allowed a credit against their Maryland tax of up to 7.95% of the tax paid to another state. Thus, the tax on non-Maryland income of Maryland residents would never be more than the greater of (i) the Maryland tax rate or (ii) the tax rate in the state where the income is earned.

Let me summarize: By changing the manner in which the statute is drafted, no Maryland voter would pay more tax on his or her income and many would pay less. The loss occassioned by the reduction in taxes on Maryland income would be offset by an increase in taxes on non-Maryland residents. In many, if not most, cases, this tax increase would not be borne by the non-Maryland resident, but by their home states.

What's not to like?

1 comment:

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