Effective in 2008, Maryland has begun an indirect tax on interest earned on U.S. obligations, including U.S. Savings Bonds, in violation of 31 U.S.C. 3124(a) which exempts such interest from State and local income tax. Here's how: Maryland now has several different amounts for a taxpayer's personal exemption, ranging from $3200 to $600. The amount of the taxpayer's personal exemption directly affects the amount of the taxpayer's taxable income in Maryland. Here's the problem. The amount of the taxpayer's personal exemption is based on the taxpaper's TOTAL Federal adjusted gross income, including interest earned on U.S. obligations. Because I earned interest on U.S. Savings Bonds in 2008, my Maryland tax liability increased by $191 above what the liability would have been had I not received such interest. Obviously, this is a tax on such interest.

I am appealing to the Maryland Tax Court--no date yet set. Does anyone know of any other State using this indirect method to tax interest on U.S. obligations or is anyone aware of litigation on this issue? Thanks.
Winston J. Dean, J.D., M.P.H.