The Taxman Cometh, Twice
Among the cases teed up for the Supreme Court’s current Term is Comptroller v. Wynne, arising over the state taxation of personal income earned and taxed in other states (and therefore, in interstate commerce). The vast majority of state and local jurisdictions credit residents’ taxes paid to “foreign” jurisdictions, meaning other states. Maryland credits such taxes against state but not against local income taxes (which are collected by the state). Through an S-corporation, the Wynnes (Maryland residents) earned a ton of income in 30-plus states and paid income taxes there—and then paid the local tax on that income again, without receiving a credit. The Maryland Court of Appeals deemed the arrangement unconstitutional. The Comptroller asked for and received cert. Briefs etc. can be found here.
Boring? Maybe (unless you live in Maryland and earn income elsewhere). But there are reasons to pay attention.
First, the Supreme Court’s Fourteenth Amendment excursions are just too damn depressing. Also, they belong on fingerpainting.com, not on a law blog. Maybe, though, the Court can still get other cases right. Alas, and
Second, one must apprehend that at least some justices may not get this case right, either. And if they get it wrong, it will be for ostensibly “textualist” reasons. If that were to happen,
Third, there would be no legal impediment to states’ taxing the same income two, three, four, or five times.
Nothing in the strict text of the Constitution blocks that outcome. The Due Process Clause bars wholly extraterritorial state taxes and regulation; but neither Maryland nor any of its sister states is imposing such a tax here. The Import-Export Clause (Art I, Sec 10) forbids (discriminatory) taxes on, well, imports and exports: inapplicable here. The Privileges and Immunities Clause (Art. IV Sec. 2) forbids states from discriminating against non-citizens: also not at issue. The thing that forbids Maryland’s tax scheme here is the so-called “dormant Commerce Clause doctrine”—that is, the notion that the Commerce Clause, which authorizes Congress to regulate commerce among the several states, of its own force prohibits certain state taxes and regulations, even in the absence of any congressional action.
“Dormant Commerce Clause” is a misnomer, in two respects. One, its point is that the Commerce Clause is awake even when Congress is asleep. Two, as Justice Thomas has duly noted, there’s nothing dormant about the Court’s jurisprudence in this venue: the doctrine has been deployed in hundreds of cases. It is generally understood to prohibit discriminatory state taxes and regulations; to that extent, the doctrine overlaps with the Import-Export Clause and the Privileges and Immunities Clause. (Unlike that clause, however, it protects corporations as well as individuals.) But the dormant Commerce Clause has also been deployed to block what the Supreme Court calls “balkanization”—that is, inconsistent or conflicting laws that subject interstate commerce to burdens that in-state commerce does not have to suffer. The operative rule is what the Supreme Court has called an “internal consistency” test: if every state applied this tax regime, would that expose interstate commerce to burdens not suffered by in-state commerce? Maryland’s regime violates that test.
How, though, does one get from the Constitution to a test like that? In the olden days, the Supreme Court operated with territorial, due process-ish categories: income could be taxed only where it was earned. That approach works tolerably well with respect to property taxes. Not so well—in fact, not at all—with respect to intangibles or business income. Thus, in a path-breaking decision in Western Livestock v. Bureau of Revenue (1938), the Court abandoned territorial categories and instead adopted a coordination rule, based on a principle of non-discrimination: let’s make sure interstate commerce “pays its way,” without being subject to excess state impositions. This means that (corporate) income must be fairly apportioned for purposes of state taxation. And it means that states can’t unilaterally exploit interstate commerce. The “internal consistency” rule is intended to ensure that outcome.
Importantly, the test does not prohibit double taxation in all instances: two internally consistent tax regimes may yet produce double taxation. As some of my friends and former colleagues at the American Enterprise Institute explain in a terrific amicus brief, the problem with Maryland’s tax regime is that it taxes “inbound” income earned by its citizens on one basis (residence) and “outbound” income earned by non-citizens within Maryland on another basis (source). Both taxes are facially non-discriminatory; it’s the conjunction that is “internally inconsistent” and imposes excess burdens on interstate commerce. Most states solve the problem by crediting residents’ taxes paid elsewhere; and needless to say, the Wynnes favor that solution. But in theory, Maryland could also solve the problem by not taxing outbound income (in which event the Wynnes would still be taxed twice) or by apportioning income. The dormant Commerce Clause doesn’t tell states how to configure their tax systems, just so long as they don’t impose excess burdens on interstate commerce.
Barring a major revamp of this jurisprudence, it’s hard to see how the Wynnes can lose. The state court got this right, and there’s no conflict with binding decisions elsewhere. So why did the Supreme Court—which grants cert to state courts only in exceedingly rare cases—yank this case up?
I have a fear: in a string of cases, Justice Thomas and Justice Scalia have argued, both with characteristic force and clarity, that the entire dormant Commerce Clause is completely made up. (Justice Thomas seems prepared to jettison it altogether.) To their minds, the doctrine is an extra-textual invention—an interstate version of Lochner, and a constitutional common law rule of the sort that we’re not supposed to have. The Chief has expressed sympathy with that view. Maybe they found a fourth vote to grant cert. And maybe we’ll be treated to another disquisition on the baseless, illegitimate dormant Commerce Clause.
The Upside-Down Constitution explains in ’scruciating detail why this view is wrong. More convenient for readers without access to this magisterial tome, the Vanderbilt Law Review is hosting an essay-form forum on Wynne, featuring yours truly alongside actual experts. I’ll forward the link once the exchange appears, close to the argument date of November 12. Meanwhile, consider this:
Constitutional common law rules, like the dormant Commerce Clause, are inferred from the Constitution’s structure, and they govern presumptively as default rules—until and unless Congress says otherwise and affirmatively permits states to do the things that the default rule prohibits. One can argue, as Justice Scalia has on occasion, that all such rules are illegitimate: how can an unconstitutional state law become constitutional just because Congress says so?
The argument has some superficial plausibility. However, it runs up against a 195-year-old precedent involving, as luck would have it, this same state: M’Culloch v. Maryland (1819) held that states may not tax or otherwise encumber, in a discriminatory fashion, federal institutions such of the Bank of the United States—unless Congress explicitly permits it. The argument for the default rule is that without it, the states would make mincemeat of the federal structure. Yes: Congress could always prohibit state interferences pursuant to its copious enumerated powers. But it’ll often sit on its duff, and it can’t anticipate every devious scheme some state may dream up. That’s why you need a default rule—like M’Culloch, and like the dormant Commerce Clause.
You can argue that M’Culloch was simply wrong on this point. Some textualist-originalists do believe that. But to take on John Marshall and one of his most foundational decisions requires way more argument than I’ve seen to date. Alternatively, you can argue that the M’Culloch rule is right but the dormant Commerce Clause is wrong. But that seems unlikely. If Congress can be expected to protect anything at all, it’s its own institutions (like the Bank). Protecting commerce among the states on non-discriminatory, non-exploitative terms? Not so much. No tax coordination rule has ever come from Congress (let alone the states themselves). The argument against the dormant Commerce Clause is an argument for unchecked state aggression.
John Marshall’s reply to that sort of proposition was consistent in case after case: the Founders were too wise to give us a stupid Constitution. But maybe he was wrong about that, too.