Since the onset of the pandemic, millions of Americans have switched to working from an office location to working from their own homes. For most of these Americans, this change represented just one more complication in a year that has been nothing if not complicated. But for the roughly 3.5 million Americanswho usually commute across state lines but are now working from home in compliance with public health recommendations, it can carry a substantial tax bite as well. Action from Congress is badly needed to protect taxpayers from the worst state impulses to relentlessly pursue revenue.
States are already facing down budget deficits due to the pandemic, and state income tax collections areprojected to be significantly lower than last year. That has states looking to extract every dollar they can, and who better to target than out-of-state residents that can’t express their anger at the ballot box?.
States like Massachusetts have simply declared that they would continue to hold nonresident remote workers liable for paying income taxes as if they were still commuting into the Bay State. Of course, these nonresidents are not commuting into Massachusetts anymore, meaning that their work has no direct connection to the state and they derive no conceivable benefit from Massachusetts’s state-provided services.
Nowhere is this felt more keenly than for New Hampshire residents, as the Granite State does not impose income taxes on ordinary income. A taxpayer with the median New Hampshire household income of just over $74,000 and a single dependent child could find themselves paying an additional $2,711 for the months of March through December of 2020 if Massachusetts’s aggressive tax enforcement is left to stand. Of course, that New Hampshire resident would still have to pay their home state’s relatively high property taxes, the tradeoff for the lack of income tax in the state.
In response to this potential income tax hike for 123,000 of the state’s residents, New Hampshire Governor Chris Sununu has filed suit against the state of Massachusetts for its treatment of New Hampshire remote workers. Because it is a case between two states, the case goes straight to the Supreme Court.
But New Hampshirites are not the only ones who stand to lose out from states’ income tax grabs against remote workers. Many other states have put their budgetary bottom lines ahead of the good of the taxpayers who are also struggling to make ends meet due to the pandemic.
New York is just one state that uses a “convenience of the employer” rule for remote workers, which essentially requires employees of New York-based businesses who switch to remote work to prove that their work from home is not a matter of convenience but of necessity before New York accepts that it cannot tax that employee’s income. In addition to paperwork headaches, this could lead to double taxation, as the state where the work is performed can also claim the right to tax the same stream of income
The National Taxpayers Union Foundation calculated the impact this could have on taxpayers, and it is unfortunately quite significant. A single filer making $42,620 with no children, for example, would face an additional tax liability of just under $1,400 from having nine months of income between April and December taxed by both New York and Connecticut.
While New Hampshire’s suit is admirable, the problem is too expansive for the Supreme Court to play whack-a-mole with aggressive state tax grabs. Fortunately, the Senate’s Phase Four opening offer included a fix to protect remote workers and standardize tax treatment based on bipartisan legislation from Senators John Thune (R-SD) and Sherrod Brown (D-OH), creating optimism that this may eventually make its way into a final package.
However, Congress must be certain not to put this fix off for too long. The last thing taxpayers coming out of an economic recovery need is to be faced with a shockingly high tax bill because Congress failed to act to rein in revenue-desperate states.