Taxpayers know all too well how hungry states can be when searching for revenue. This issue is especially prominent for taxpayers who live in one state and work in another where the question of which state gets to tax their income is a major problem for them and creates major double taxation risks. In these situations, taxpayers can be subject to multiple states taxing their income, with multiple states asserting taxing jurisdiction over the earned income. All states deal with this issue by giving residents a tax credit for state and local income taxes paid to another state to prevent income from being taxed twice.
However, this system only works if the state grants taxpayers a full credit. Pennsylvania is refusing to grant credits that consider a resident’s full state and local tax liability. A case is now pending before the Supreme Court of Pennsylvania that rightly argues that denying taxpayers full credits for state and local income taxes paid in another states violates the Dormant Commerce Clause by discriminating against interstate commerce.
The case is Zilka v. Tax Review Board City of Philadelphia, where Diane Zilka, a Philadelphia resident who works in Wilmington, Delaware, was denied a credit for 1.93 percent of her Delaware tax liability. This happened because Delaware has a five percent state income tax rate and Pennsylvania only has a 3.07 percent income tax rate.Philadelphia did not allow her to credit her excess Delaware state income tax paid against Philadelphia’s 3.92 percent local wage (income) tax. The end result was Zilka being taxed higher for working across state lines than she would have been if she worked in Pennsylvania because Pennsylvania did not consider her full state and local tax liability when calculating the credit.
This is a clear violation of the Dormant Commerce Clause, which prohibits states from discriminating against out of state commerce. By not crediting Zilka’s full Delaware income tax burden, Pennsylvania is engaging in protectionist policies designed to keep residents working in Pennsylvania instead of finding work in neighboring states. These are the exact state policies the Constitution was designed to prevent.
The case is reminiscent of a 2015 Supreme Court decision that struck down a Maryland tax scheme where the state would only give credits for its state income tax and not its county income tax. Justice Alito was clear in his opinion that the “total tax burden is what matters” in Dormant Commerce Clause cases. Because Zilka’s total tax burden was higher than other Pennsylvania residents because she worked in Delaware, Pennsylvania violated the Dormant Commerce Clause by not offering her a full credit to offset her Delaware state and local income tax.
We look forward to the Supreme Court of Pennsylvania upholding United States Supreme Court precedent and ruling that the Commonwealth must provide a full credit for the state and local taxes paid to other states. This is the only way Pennsylvania can comply with the Commerce Clause and not discriminate against interstate commerce.
Double state taxation is becoming a bigger issue every day as more workers work in multiple states through remote work. The Taxpayer Defense Center was proud to stand with New Hampshire taxpayers when Massachusetts attempted to tax New Hampshire residents during the COVID-19 pandemic, and it will stand with the taxpayer in Pennsylvania too. National Taxpayers Union Foundation and its Taxpayer Defense Center will continue to monitor this case and similar situations in other states.