The pandemic and subsequent downturn has left its mark on state and local budgets over the past year, but it could result in a permanent loss of income for New York.
That’s because a case submitted to the U.S. Supreme Court could potentially block New York — and six other states — from collecting some income taxes from out-of-state workers whose jobs are based within their borders. According to an analysis by Kroll Bond Ratings Agency, New York stands to lose more than $720 million in annual income taxes collected from out-of-state residents if those commuters start working from home an average of 25% of the time.
New Jersey would benefit the most to the tune of $528 million in income tax revenue gained from New York, according to Kroll. Connecticut would also get to clawback nearly $193 million in income tax revenue under this scenario.
Kroll noted the new work from home dynamics created by the pandemic is “especially noteworthy in those states with major economic centers, like New York and Massachusetts,” and is “leading to disagreements with potential revenue implications.”
At issue is the fact that seven states tax people based on where their job is located — even if they are residents in another state. This “convenience rule” was already in effect in Arkansas, Connecticut, Delaware, Nebraska, New York, and Pennsylvania before the pandemic. Massachusetts implemented its own version just this year.
That decision by Massachusetts was basically the Lexington and Concord equivalent of the income taxation war that the pandemic has now spurred between a handful of states. The Commonwealth’s sourcing rule is largely targeted to residents of New Hampshire, which doesn’t tax income, who have Massachusetts-based jobs. New Hampshire responded in the fall of 2020 by suing and that case, New Hampshire v. Massachusetts has been submitted to the Supreme Court for review.
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Other states that are also affected by their neighbors’ convenience rules have jumped on to the issue largely because it’s clear that the work from home bump in 2020 from the pandemic won’t totally go away. States have made some accommodations for their taxpayers so they can avoid double taxation in 2020, but the issue needs to be settled going forward.
Numerous states and private parties have filed amici briefs in support of New Hampshire — and not one has as of yet been filed in support of Massachusetts. In its joint brief, the states of Connecticut, Hawaii, Iowa and New Jersey emphasized “that this issue is of nationwide importance; implicates billions of dollars in tax revenue for state treasuries; and will continue to be of great consequence in the future.”
The Supreme Court, if it takes the case, could choose to rule narrowly. According to Kroll’s figures, a ruling favoring New Hampshire would would likely affect some $100,000 in future income tax revenue from telecommuters. Nearly $30 million of that revenue could go to Connecticut coffers and $85 million could end up back in the pockets of New Hampshire taxpayers.
But if the court issues a broad ruling, it would change the game for New York and a great number of states beyond the northeast.
Under the current scenario, someone “who spends her day working at home in New Hampshire could be required to pay Massachusetts taxes on her entire income, even though her Home State (where she spent the entire month) levies no such tax,” the states’ joint brief said.
“Similar rules apply to the Iowa resident who regularly works from home for an employer in Omaha, the Oklahoma employees who work from home most days for a boss in Fayetteville, and the Connecticut and New Jersey residents who work most days from their Stamford or Jersey City apartments for a company based in Manhattan,” it continued. “That so many individuals across the country would be affected by the disposition of this case bolsters its importance—and thus confirms the urgency of exercising original jurisdiction.”