When the National Taxpayers Union Foundation released its study on states’ tax policies affecting remote and mobile workers, the 2023 Remote Obligations and Mobility (ROAM) Index, one of the more notable results was the lack of clear divide between red and blue states. While the usual suspects like New York and California scored poorly and Texas and Florida scored high (by virtue of having no individual income tax), other states were not easily grouped by political ideology. One example of this phenomenon was the poor score received by Alabama, which ranked 43rd out of 50 states. Unfortunately, that doesn’t appear likely to improve soon.
If I’ve written in this space before about “convenience of the employer” rules a lot of late, it’s because they are so pernicious. These rules essentially require taxpayers who switch from working in-person in one state to working remotely in another to continue paying income taxes to the state they used to work in, not the one they currently work in.
But particularly troubling about “convenience of the employer” rules is the fact that most of the time, creation and enforcement occurs without any elected representative raising a finger in support. Part of how states with legislative majorities that pride themselves on not overburdening taxpayers with confusing regulations and excessive tax burdens end up doing just that is that their tax authorities never bothered to ask those legislators for permission.
That’s what just happened in Alabama, where the Alabama Tax Tribunal upheld an Alabama Department of Revenue effort to continue levying income tax obligations against a man who switched from working in Alabama to working remotely for the same business in Idaho. The legislature never told Alabama’s Department of Revenue to tax out-of-state workers — it simply took it upon itself to creatively interpret existing law.
But while “convenience of the employer” rules might appear to state revenue officials to be an easy way to keep pesky taxpayers from trying to escape their clutches, they threaten to undermine a truly revolutionary opportunity for taxpayers to flex their muscles.
Up until now, taxpayers’ ability to choose where to pay taxes has been largely restricted to a radius of commuting distance from where they can find a job. Remote work means that they can, if they wish, choose to live just about anywhere. Taxes are certainly not the only consideration in that choice, but they are a major one.
“Convenience” rules undermine that choice by claiming that it doesn’t matter where a taxpayer physically works from, what matters is where a taxpayer’s business is located. Ironically, an argument that is presented as a logical adaptation to changing economic circumstances is, in reality, just a thinly disguised attempt by state revenue officials to stick their heads in the sand.
At the most basic level, taxes are a contribution towards government services a taxpayer benefits from. Of course, there is not a one-to-one relationship between taxes paid and services received, but a taxpayer commuting into a state benefits from the roads maintained, emergency services provided, and all the infrastructure that goes into maintaining the office they work in. Even though they lack representation in that state, it makes sense that their income taxes would go to the state facilitating their ability to earn an income.
But that no longer holds true when a taxpayer switches to working remotely. A taxpayer living in Idaho is receiving no benefit from Alabama services. The only relationship that taxpayer has to Alabama from that point is through his employer (which pays corporate income taxes) and his co-workers still physically working there (who still pay individual income taxes).
Imagine that every employee in that office switched to working remotely in Idaho, leaving an empty office. That office could burn down in a fire, be ransacked by thieves, or destroyed in a natural disaster — with no impact whatsoever on the remote workers’ ability to do their job and earn a living. Clearly, there’s no longer any relationship between the Idaho-based taxpayer and the government services they are forced to pay taxes for.
Setting aside esoteric arguments about fairness that are hardly the tax departments’ driving motivation regardless, should states pursue “convenience” rules aggressively, other states will only retaliate. New York is already learning this the hard way, with Pennsylvania enforcing its own rule and Connecticut enforcing a retaliatory version directed at New York — with New Jersey likely to follow suit. In the end, no states will “win,” but taxpayers will certainly lose.
It’s clear that state legislators who wish to avoid placing illogical and confusing tax burdens on out-of-state workers can no longer simply not vote to do so. Legislators need to act proactively to preclude their tax departments from doing so on their own.
