As with any major economic shift, some governments will see remote work as an opportunity, while others will see it as a threat. States and localities that view remote work as a threat have only two options: they can engage in a costly and ultimately futile battle to try to reverse the changes that remote work is bringing, or they can embrace remote work and adapt. Unfortunately, to this point, many appear to have a preference for the former.
To some extent, it’s an understandable response. To cities that were bustling before the pandemic, remote work threatens a tangible loss in revenue and economic activity.
Take Manhattan, which is losing $12.4 billion per year, according to a recent estimate by Bloomberg News. Workers who used to commute into New York City daily have switched to hybrid or even entirely remote schedules. By the end of 2022, worker attendance at Manhattan offices had recovered to only 43 percent of pre-pandemic levels.
But New York appears largely content to combat the resulting loss of tax revenue by pretending it isn’t happening. When remote workers try to leave the state for greener pastures, New York tells them that they still owe income tax.
That’s because New York has what is misleadingly called a “convenience of the employer” rule. This friendly-sounding rule requires New York employees who switch to working remotely out-of-state to continue paying income taxes to New York so long as they could possibly have continued to work in New York. Unsurprisingly, the standard for proving that you could not have continued to work in New York is exceedingly difficult to reach.
New York has somewhat of a reputation at this point for snatching at the tax revenue of taxpayers with even the slightest connection to the state. Early on in the pandemic, when New York City was a COVID hotspot, city and state officials begged medical workers to volunteer to come from across the country to help. Many did, only to find that New York expected them to pay taxes on income earned while there. Even a plea for help turned into a revenue-raising opportunity.
At its core, the increasingly digital economy is chipping away at a crutch that some states have relied upon too heavily to attract workers — the need for proximity. Freed of the need to live near their offices, Americans who do not want to live in overcrowded cities, pay exorbitant tax rates, and deal with high costs of living no longer have to. Resulting urban flight is just a manifestation of revealed preferences.
Cities may bemoan lost tax revenue, but reactions like New York’s can only be harmful. Not only is New York trying to get remote workers to fund government services that they no longer benefit from, but it is likely to get its own taxpayers caught up in similar, retaliatory rules from other states.
For example. Connecticut also imposes a similar “convenience of the employer” rule — but only on residents of states that have “convenience of the employer” rules of their own, like New York. New Jersey may soon do the same.
Should these competing “convenience of the employer” rules spread, the result will only be more confusion for taxpayers. Taxpayers will increasingly be forced to pay taxes to states where they do not vote and do not benefit from the government services they have to fund, violating core principles of fair taxation. Even states with these rules won’t win — while they’ll nab revenue from out-of-state taxpayers, their own remote-working residents will end up paying taxes to other states.
Unfortunately, the collateral damage in this revenue battle between states and cities is likely to be taxpayers themselves. The only sustainable path forward is for states and localities fearing remote work changes to stop trying to force taxpayers to be subject to their tax codes and start trying to make their tax codes ones that taxpayers want to flee in the first place.
