A recent U.S. Supreme Court decision could affect cities in Ohio and other states regarding how they tax their residents. The case arose in Maryland, but the Supreme Court ruling could impact as many as 5,000 jurisdictions nationwide, including Ohio, that impose local income taxes.
The issue involved a resident who earning income outside of his state. At the state level, the resident received a tax deduction for his Maryland state tax bill for the amounts he paid in other jurisdictions where the income was earned.
His complaint was with county component of the state tax, where he received no deduction. He argued he was unfairly subjected to double taxation for income that had no connection to that county.
Maryland imposes a tax on all taxpayers’ income, but separates out a state and county component. The state provides a deduction for the state component, but there is no deduction for the county component.
The Court agreed with the taxpayer, finding the Maryland tax inconsistent, because it treated income earned differently depending on where the income was earned. It resulted in income earned outside the state being more heavily taxed, and this inconsistency made the tax unconstitutional.
Ohio state income taxes, like the state component of the Maryland tax, allow a full tax deduction for taxes paid out of state. However, some Ohio cities provide varying amounts of credit for taxes on income earned outside the state.
The Ohio Supreme Court allowed this practice, but it may now conflict with the U.S. Supreme Court’s ruling.
The case was unusual in that the 5-4 decision produced a very mixed dissent, featuring four separate opinions by Justices Scalia, Ginsburg, Sotomayor and Kagan.
Source: bizjournals.com, “Ohio cities’ income taxes could be affected by Supreme Court ruling,” Evan Weese, Columbus Business First, May 20, 2015