Montgomery County is set to take a big hit in tax revenue thanks to the U.S. Supreme Court’s decision Monday that Maryland’s income tax law is unconstitutional.
In a 5-4 decision, the Supreme Court ruled the state must provide a credit on the county portion of the state income tax for those who pay taxes on out-of-state earnings.
Withholding that credit violates the Commerce Clause, according to the majority opinion written by Justice Samuel Alito.
Brian and Karen Wynne, a Howard County couple, brought the case, alleging that the lack of a credit resulted in double taxation. The two are part owners of a medical staffing company and reported $2.7 million in income in 2006.
The decision will hit Montgomery County hard.
The county could lose between $8 million and $10 million in income tax revenue during the fiscal year that begins July 1.
Fiscal years 2017 and 2018 could bring losses of between $18 million and $55 million, split between back taxes owed and a cut in projected tax revenues, according to Leventhal.
A memo from County Executive Ike Leggett predicted the county would lose “over $50 million” in fiscal year 2017.
“As we have done in the past, we will continue to work closely with the council to jointly and comprehensively address this challenge to maintain the county’s strong financial position going into the future and ensure the continuity of essential services,” Leggett wrote Monday in a memo to Leventhal.
The decision will also mean $25 million less in tax revenue annually in fiscal year 2019 and beyond.
“For all of us it requires us to be careful, as I think we have done, and make sure where we’re spending tax dollars, they’re being put to their best and highest purpose,” County Council President George Leventhal said Monday.
While the county was preparing for the possibility of an adverse decision in the case, Leventhal said it’s possible the council will have to make some mid-year adjustments to the budget for the upcoming fiscal year.
Still, Leventhal said he was “entirely comfortable” with the budget that’s expected to be formally approved this week.
The $5.07 billion budget is about $18 million more than what Leggett proposed. The council is withdrawing $15 million from the county’s $400 million reserve fund to pay for the additional spending.
As Leggett discussed his recommended budget this winter and spring, he said it’s possible he will recommend raising the county’s property tax rate above thelimit allowed by the County Charter for fiscal year 2017. That move would require unanimous approval by the nine-member council.
The Wynne case decision could make a property tax hike more likely.
“We’re disappointed. We would have preferred to have that revenue, but the Supreme Court is the final arbiter and we respect that decision,” Leventhal said. “It will have some impact on our decisions moving forward.”