Back in the Dark Ages (pre-Wynne17), when I used to teach state and local tax law at the Saint Louis University School of Law, my students and I grappled with the issue of whether a state should have the right to tax 100 percent of its residents’ income, given that the state has substantial nexus over the person, but not necessarily any nexus at all over 100 percent of that resident’s income if the person worked in another state.

That states are required by the Constitution to give to their residents a credit for income taxes paid to another state (up to the amount of the resident state’s income tax) on the same income seems to be an imperfect solution to the “double tax” issue, because the poor resident taxpayer is always stuck with paying an amount equal to the higher of the two taxes. If the resident state’s rates are lower, the taxpayer will pay the higher tax on the earned income, but the lower residence tax on unearned income (and vice versa).

Many of my students, however, liked better the concept of both types of income acquired by an individual being taxable by only one state — that is, the earned income would only be subject to state tax in the employment state, and the unearned income would only be subject to state tax in the residence state. This concept seems to resolve the nexus issue, because each state would only be able to tax income that was rightfully sitused within its jurisdiction, and each type of income would only be subject to the appropriate rate, and only once. In situations in which the residence state’s rate is higher, the taxpayer would pay the employment state’s lower rate on earned income, and in situations in which the residence state’s rate is lower, the taxpayer would pay the employment state’s higher rates on the earned income. Fair is fair, and my students thought that was as it should be. Besides, although taxpayers working and residing in different states would still have to file two returns, those returns would be less complicated without the difficult and often confusing “credits for taxes paid” calculations.

Diane Zilka’s situation, however, further exacerbates the complicated “credits for taxes paid” issue. Because Ms. Zilka resided in Philadelphia, she had to report 100 percent of her Wilmington, Delaware, earnings to two state and two local taxing jurisdictions. The combined Delaware SALT rate on wages was 6.25 percent, and the combined Pennsylvania SALT rate on wages was 6.99 percent. The Delaware rate was higher than the Pennsylvania rate, so Pennsylvania gave Ms. Zilka a full credit, with some left over. Unfortunately, however, the Wilmington rate was lower than the Philadelphia rate, and although Ms. Zilka got a full credit against Philadelphia tax for the Wilmington tax she paid, Philadelphia flatly refused to give Ms. Zilka credit for the excess Delaware taxes she paid against her Philadelphia tax. So, using $1,000 as her hypothetical income, (and assuming no unearned income) how much tax should she have paid, and how much did she actually pay?

• If we adopted my student’s “nexus” computation in Ms. Zilka’s situation — EUREKA — we would have achieved total parity! That is, if she had only had to report income earned in Wilmington, Delaware, to Wilmington and Delaware, and assuming she only had earned income of $1,000, Ms. Zilka only would have been subject to a 5 percent Delaware state tax and a 1.25 percent Wilmington tax, or a total tax of 6.25 percent (which is, at least according to my students, as it should have been), regardless of the aggregation rules. Applying my students’ proposal, she would have paid a total of $62.50 to the jurisdictions in which the income had been earned, and Philadelphia and Pennsylvania would not have been involved at all.
• Under the “acceptable” credit rules —and with that parity being all that Ms. Zilka is requesting — if we assume the state and city taxes are aggregated in both Pennsylvania and Delaware, Ms. Zilka still would have to pay the higher of the two taxes (or a total tax of 6.99 percent (5 percent to Delaware, 1.25 percent to Wilmington, and 0.74 percent to Philadelphia)). Philadelphia’s haul is a windfall, given that the income was earned in Wilmington. In the relief that she seeks, however, Ms. Zilka only wants to pay this higher of the two combined rates, for $69.90 total.
• By not aggregating the state and local tax rates, however, Philadelphia gets a super windfall of a whopping 1.93 percent tax on income that was earned in Wilmington. Under the Pennsylvania court’s decision, Ms. Zilka had to pay $50 to Delaware, $12.50 to Wilmington, and a staggering $19.30 to Philadelphia, for a total of $89.20. (Gulp.)

Poor Ms. Zilka! Let us assume that her officemate is earning exactly the same salary as she does and is a Wilmington resident. The officemate will only pay $62.50 of combined SALT on the identical amount of income earned from the same employer in the same city and state. Ms. Zilka would have to move to Wilmington, Delaware (which, obviously, the Pennsylvania courts are encouraging her to do) to achieve SALT parity with her colleague. Ms. Zilka’s Philadelphia neighbor, whom (we assume) is earning exactly the same salary as she does, but who works in Philadelphia, will pay $69.90 of combined state and local tax on the identical amount of earned income. As a reminder, all Ms. Zilka wants is to NOT pay more combined SALT on the same amount of earned income as her Philadelphia neighbor pays. I am certain that my distinguished board member colleagues will continue to vet all the scholarly constitutional arguments defending why the Pennsylvania and Philadelphia taxes must be aggregated, how Philadelphia’s actions (and Pennsylvania’s acquiescence) are clearly in violation of Wynne, how similarly situated courts in other jurisdictions are upholding the aggregation mandated by Wynne and who, accordingly, would give Ms. Zilka the “half a loaf” she is requesting, thus causing a split among the circuits, and so forth . . . but isn’t what’s wrong with this situation quite obvious? Who are the Pennsylvania courts trying to kid? Where could Philadelphia get the legal authority to enact and enforce wage taxes but from the express municipal enabling laws of the Commonwealth of Pennsylvania? For the Pennsylvania courts to deny Pennsylvania’s responsibility for the Philadelphia wage tax is analogous to situations in which parents deny responsibility for the acts of their wayward minor children. Philadelphia was already benefiting from the “credit for taxes paid” structure by “legally” getting to tax a comparatively “little bit” of income earned somewhere else, but that was not enough. Philadelphia got greedy — and Pennsylvania let Philadelphia get away with it. Or will Philadelphia get away with it? My only other concern is whether the U.S. Supreme Court will put a stop to this injustice and affirmatively answer the aggregation issue (again) in favor of Ms. Zilka. Oh, please!

This article is republished with permission Tax Notes State.