Diane Zilka lives in Philadelphia but, like an increasing number of Americans, works in a different state (Delaware). She therefore pays four income taxes (in addition to the federal income tax): 3.922% to Philadelphia, 3.07% to Pennsylvania, 1.25% to Wilmington, and 5% to Delaware.
She requested that Pennsylvania and Philadelphia (6.992% combined) credit her for the 6.25% paid to Delaware & Wilmington. Zilka cited the U.S. Supreme Court decision in Comptroller v. Wynne (2015), which held that states must offer full credits, including local taxes, on interstate income taxes to avoid unconstitutional multiple taxation. Philadelphia refused, only offering to credit against Wilmington's taxes. States credit against states, cities against cities, they argued. The Pennsylvania Supreme Court agreed in a split 3-2 decision, with even one of the justices in the majority saying the result is unfair.
The U.S. Supreme Court needs to hear this case, we argued in our brief, because Pennsylvania’s decision to treat Philadelphia as a separate sovereign from Pennsylvania would create a new loophole around the Constitution at odds with the Wynne decision, the law of nearly every other state, and because what matters is how taxes practically operate, not labels used by government officials. Every other state (except Oregon) has held that local governments must adhere to the same constitutional limitations on interstate taxes as state governments. The U.S. Constitution prohibits states from using tax policy to overly or discriminatorily burden interstate commerce. This restriction covers local taxes too. “Local” income taxes must be authorized by the state government before they can be levied.
Our brief’s summary of argument concludes: “Multistate taxation of individuals used to be the headache only of corporations, athletes, entertainers, and business travelers. But, spurred on by the pandemic, more Americans than ever before are living in one place while working in another. Taxpayers can seek legislative protections where they live, but are at the mercy of any one state that decides to soak out-of-state non-voters. The decision below gave an inch that can be taken a mile. It cannot be the last word, and this Court should take the opportunity to reaffirm that labeling a tax does not magically remove it from constitutional scrutiny.”
The case is Zilka v. City of Philadelphia, Tax Review Board, No. 23-914.