Comptroller v. Wynne: Internal Consistency, a National Marketplace, and Limits on State Sovereignty to Tax
163 U. Pa. L. Rev. Online 267 (2015)
Abstract
On November 12, 2014, the U.S. Supreme Court heard oral argument in Comptroller of the Treasury v. Wynne. The case, which has already been called the Court’s most important state tax case in decades, asks how the dormant Commerce Clause restrains state taxation of individual income. Because Wynne lacks the usual indicia of “certworthiness,” the case raises the possibility that the Court will reshape the constitutional balance between the states’ sovereign interest in collecting taxes and the national interest in maintaining an open economy.
The challenge for the Court, whose dormant Commerce Clause rulings have attracted intense criticism, is to delineate clear limits on state taxation that promote a national market economy without unduly restricting the states’ taxing authority. In earlier writings, we developed a framework to resolve tax discrimination cases in a consistent and intuitive manner that provides states with broad flexibility while maintaining an open interstate market. In this Essay, we apply that framework to Wynne to demonstrate how Maryland’s current system violates the dormant Commerce Clause. We also describe how our approach addresses Maryland’s arguments and resolves many issues that seemed to trouble the Justices at oral argument.
The rest of this Essay proceeds as follows. After providing the factual and legal background of the case, we show that the contested Maryland income tax regime fails the Court’s long-standing internal consistency test and so would be struck down were the Court to apply that test. We then respond to Maryland’s three major arguments why the Court should not apply the internal consistency test. Drawing on our earlier work, we first show that Maryland’s principal claim, that its tax law does not discourage cross-border commerce because residents are taxed at the same rate on in-state and out-of-state income, whereas non-residents are taxed at a lower rate on in-state income and not at all on out-of-state income, is not dispositive. Maryland’s argument should not prevail because economic analysis shows that the comparison of tax rates that Maryland offers is too simplistic to reveal whether the Maryland tax system discourages cross-border commerce. Second, Maryland claims that any interference with the Wynnes’ cross-border commerce stems from the interaction of different states’ tax systems rather than Maryland’s tax regime alone. This claim is wrong, and we show that Maryland’s tax system would burden interstate commerce even if no other state imposed taxes. Third, we show that Maryland’s claim that a decision for the taxpayer would allow residents with out-of-state income to free-ride on Maryland’s public services is overstated because the internal consistency test provides states with wide flexibility to tax.
The arguments in Wynne largely followed the outline above, with an important exception. The taxpayer argued that the dormant Commerce Clause requires Maryland to eliminate double taxation of their interstate commerce for the simple reason that Maryland is their state of residence. But the Court’s dormant Commerce Clause doctrine does not clearly support the interpretation that the state of residence must eliminate double taxation. Nor is such an interpretation needed for the Wynnes to win their case. Rather than requiring elimination of double taxation, the dormant Commerce Clause prohibits states from discriminating against interstate commerce. We show that Maryland discriminates against interstate taxation, and this discrimination would persist even if no other states imposed taxes. It is, therefore, independent of any double taxation that arises under the Maryland tax, and it is also independent of any action other states take. Double taxation is not the focus of the dormant Commerce Clause, and avoiding double taxation is not the same as not discouraging cross-border commerce. As we show, a state can discourage cross-border commerce even though there is no double taxation, and double taxation can occur without discouraging cross-border commerce.