The rumors of the death of remote work have been greatly exaggerated. While rates of remote work have dropped significantly since the period of enforced lockdowns during the pandemic, a majority of Americans capable of working remotely do so at least part of the time, a drastic change compared to before 2020.
Americans have taken advantage of this newfound freedom to move to greener tax pastures. While Americans already tended to move away from high-tax states and towards low-tax states, this trend accelerated in the first year of the pandemic, suggesting that taxpayers are responding to emancipation from office work to move to states that offer more competitive tax codes.
With all of this in mind, it is more important than ever for states to set themselves up for success by crafting a tax code that is friendly to not only traditional taxpayers, but also the remote and mobile taxpayers making up the “new” workforce. As the numbers of remote and mobile workers increase, states have begun to recognize the increased importance of tax policies that exclusively affect these groups.
The National Taxpayers Union Foundation’s Remote Obligations and Mobility (ROAM) Index provides insight into some of these policies and how different states currently compare. Under the ROAM Index, all fifty states are ranked based on four metrics: filing thresholds, withholding thresholds, reciprocity agreements, and convenience of the employer rules.
Filing and withholding thresholds represent the amount of time a taxpayer can spend working in a state other than their state of residence before they are required to file an income tax return (or their employer is required to withhold taxes on their behalf). Most taxpayers aren’t even aware that this is a possibility, and when they are, the burdens of filing separate returns in states around the country based on a few days’ worth of income can be substantial.
Along these same lines, reciprocity agreements are bilateral agreements between two states that only require commuters between those two states to pay income taxes to their state of residence. This greatly simplifies tax filing for hybrid workers who live in a different state than where their office is located — without a reciprocity agreement, these taxpayers must track which days they work in each state, not to mention navigate the sometimes confusing process of filing in two states then claiming a credit for taxes paid to another state.
While those are all good policies that are helpful for taxpayers, the last metric is not. Convenience of the employer rules require taxpayers to pay taxes to their state of work, even when they live and work in a different state. Not only is this counterintuitive, but it functionally results in higher taxes for taxpayers and taxpayers paying taxes to states in which they rarely, if ever, benefit from the services their taxes ostensibly pay for.
Since just last year, two states have passed significant reforms that have enabled them to stand out from the crowd. While the nine states with no individual income tax hold the top nine spots on the ROAM Index, as they, by definition, impose no individual income tax burdens on incoming remote and mobile workers, Indiana and Montana managed to leapfrog many other states to become the highest scoring states with an individual income tax on the ROAM Index with some fairly simple reforms.
Both Indiana and Montana passed filing and withholding thresholds last year that ensured that nonresident taxpayers would have to spend more than 30 days working in their state before they would be required to file Indiana or Montana income tax returns — or until their employers would be required to withhold income taxes on their employees’ behalf. This provides a reasonable safe harbor, ensuring that taxpayers aren’t required to file income tax returns in either state frivolously.
Indiana in particular stands out as a state that has done nearly everything it can to score well on the ROAM Index, also boasting reciprocity agreements with nearly every neighboring state.
Policymakers in other states should look to these states’ examples, particularly Indiana’s, in the coming years. The blueprint to becoming a state friendly to remote work is right in front of their eyes.
