Monday, August 28, 2006


Two recent opinions illustrate the problems that America's mobility poses states and localities in raising tax revenue.

In Antzis v. Comptroller, the Maryland Tax Court addressed the question of whether a tax, levied on the Maryland income of non-Maryland residents, was constitutional. The facts, as set forth by the Court, are as follows:
Petitioners are three married couples that reside in Pennsylvania and file joint nonresident Maryland income tax returns. The returns are filed because in each case the husband is a partner in a multi-state law firm with Maryland and Pennsylvania operations. The partnership apportions its income among the states in which it does business, and this creates Maryland taxable income for each Petitioner pursuant to §10-210 [of the Maryland Tax-General Article]. There also exists a withholding obligation for the partnership under §10-102.1 [of the Maryland Tax-General Article]. These taxes are not in dispute.

In 2004, the General Assembly of Maryland enacted a special tax applicable to non-residents. The tax requires non-residents to pay income tax equal to the state rate (4.75%) imposed by §10-105 [of the Maryland Tax-General Article], "plus an amount equal to the lowest county income tax rate set by any Maryland county in accordance with §10-106.1 of [of the Maryland Tax-General Article]." . . . Petitioners did not pay the amount required by §10-106.1 and were assessed accordingly. Petitioners' contention is that the tax imposed by §10-106.1 is unconstitutional.

Maryland income taxes on both residents and non-residents can be described as follows. The resident taxpayers’ payment is split between two separate taxes, namely the state income tax portion that goes into the General Fund of Maryland, and a local tax portion that goes to the taxpayer’s county of residence, or to Baltimore City in the case of a city resident. The local tax revenues are used to fund local services. By contrast, the non-resident taxpayers' tax consists of the state income tax portion at the same rate paid by residents, plus the special non-resident tax, both of which go into the General Fund. Non-residents pay no local income tax because they have no local county of residence. As stated earlier, residents do not pay the special non-resident tax prescribed by §10-106.1.

Petitioners contend that imposing the special non-resident tax exclusively on nonresidents, coupled with the differences in how the tax revenue is allocated, equates to discrimination against the non-resident in violation of both the United States Constitution and the Maryland Constitution and Declaration of Rights. To support these contentions, the Petitioners assert that the state income tax and the local income tax are different taxes and cannot be combined to determine whether residents and non-residents are being taxed equally.
The taxpayers principally relied upon Fulton Corp. v. Faulkner, 516 U.S. 325 (1996), contending that the Maryland statute expressly discriminates against nonresidents by levying a tax on nonresident income which has no direct corollary with respect to residents. Among the arguments that they raised was that "the special tax compensates for nothing, and cannot be 'fairly related to the services provided by the State [which benefit interstate commerce].'"

In one paragraph, the Tax Court succinctly put that argument to bed:
To fully explore these contrasting points-of-view, this Court questioned counsel as to whether a nonresident taxpayer gains any direct or indirect benefit from local services being provided by a Maryland county or by Baltimore City. Such local services traditionally include police and fire protection, waste disposal, water and sewer services, and the myriad of other local governmental activities on behalf of people within each local jurisdiction. It was conceded that such local benefits do, in fact, accrue both directly and indirectly to nonresidents while they are present or doing business in a jurisdiction. Obviously, both residents and nonresident receive these local governmental benefits by mere virtue of their physical presence within a jurisdiction, either in person or as part of a business entity doing business within the jurisdiction. It seems perfectly reasonable, therefore, for the State to seek compensation for these services from non-residents through the tax system. Although there is no direct mechanism to allocate the special non-resident tax revenue to a particular county, the General Fund of Maryland exists to provide funding for the benefit of all Maryland counties and Baltimore City, selectively, indirectly, to all persons or entities physically situate or doing business within its local borders.
Emphasis added.

In other words, there's no free lunch when it comes to municipal services.

In District of Columbia v. Bender, the precise legal issue was different, but the overriding tax policy issue was the same. There, owners of valuable commercial real estate in the District of Columbia sought to avoid paying taxes on income generated by those properties. The specific question before the Court was whether the tax statute violated the Home Rule Act, but the same basic principle was at stake: Whether income that is generated as a direct consequence of municipal services can be tax to fund those services. Here too, the Court sustained the taxing authority.

There was a time when most commercial activity could be readily identified to a particular physical situs. To a growing degree, that is no longer the case. Capital, both human and economic, can be put to work in one locale but managed a substantial distance away. The underlying tax policy question is whether the governmental authorities who create and maintain the public infrastructure that supports the economic activities in a specific locale can be funded by taxing income that will, if not immediately taxed, be "exported" out of the locality.

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