KANSAS CITY, Mo. (AP) - A recent U.S. Supreme Court ruling pertaining to money earned in one state by a person living in another state could be a multimillion-dollar headache for Kansas officials already struggling with budget problems, according to legal experts.
The court ruled May 18 that Maryland’s policy of providing partial credit for income taxes paid in other states is unconstitutional. Depending on how the ruling is interpreted, Kansas might eventually be forced to pay millions of dollars to residents who work in Kansas City, Missouri, which charges them a 1 percent earnings tax, The Kansas City Star reported (https://bit.ly/1d1eQ3Y ). Early estimates are the ruling could cost Kansas $35 million or more each year.
The court’s majority said the effect of Maryland’s policy is that income earned by the state’s residents in other states is taxed twice, which violates the U.S. Constitution’s commerce clause.
“The jig might be up,” said Lisa Soronen, executive director of the State and Local Legal Center in Washington, D.C. “Kansas is going to have to either give a credit for that tax paid to Kansas City, or they’re going to have to come up with something else.” She didn’t know what the alternative would be.
Kansas does give residents full credit against their state tax bills for income taxes they pay to other states, but doesn’t give a similar credit for the 1 percent earnings tax paid by Kansas residents who work across the state line.
“You need to analyze the local tax as if it were a state tax, just as the court did,” said Walter Hellerstein, a University of Georgia professor and an expert in state and local tax law.
Kansas City, Missouri, collected roughly $180 million in earnings taxes last year. If just 20 percent of those people live in Kansas, it could cost the state $36 million in revenue a year, the newspaper reported, although some Kansas City officials think up to 40 percent of those paying the tax live in Kansas, which could raise the cost to $72 million each year.
Kansas Department of Revenue spokeswoman Jeannine Koranda said the estimates were high but declined to give a different estimate. “We need additional data to provide an accurate number,” she said, “which is why we are in the process of examining the case’s impact.”
A spokeswoman for Kansas Attorney General Derek Schmidt said he would defer to the Revenue Department to assess the ruling.
The Supreme Court ruling did not order states to offer full credit for taxes paid to other states, and said states could find alternatives but did not say what those policies could be.
“There seem to be many different takes on the Supreme Court’s ruling,” said City Attorney Bill Geary of Kansas City. “It may be left to lower courts to sort out.”
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Information from: The Kansas City Star, https://www.kcstar.com
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