States Battle Each Other Over Billions in Work-From-Home Taxes

The worst fiscal crisis in decades is pitting U.S. states against one another over billions in taxes from residents working from home.

New Jersey and Connecticut on Tuesday joined a legal battle to stop neighboring states from taxing residents who -- due to the pandemic -- have stopped commuting over state lines and are now working remotely. The case, filed by New Hampshire against Massachusetts in October, has drawn more than a dozen friend-of-the-court briefs by states urging the U.S. Supreme Court to take up the challenge.

With states around the U.S. facing steep deficits and little federal aid in sight, the shift to remote work could give many cash-strapped states a legitimate way to bring back much-needed tax revenue. The situation could set up a high-stakes money grab, with New York and Massachusetts -- two regional economic powerhouses that employ tens of thousands of out-of-state workers -- battling over revenue that neighboring states now say is rightfully theirs.

“The resolution of this case thus has far-reaching implications as to which states will collect billions in revenue during the pandemic,” New Jersey wrote in its brief.

Office Tax

While the total amount paid in nonresident taxes is unclear, at stake for New Jersey is as much as $1.2 billion credited to its residents for income taxes paid to New York. Before the pandemic, more than 400,000 residents of New Jersey commuted to jobs in New York City. With many of these people now working remotely, their taxes are “more fairly attributed to New Jersey,” state Treasurer Elizabeth Maher Muoio said in a statement.

Seven states currently tax people where their office is, even if they work remotely. While six of the states have permanent policies on nonresident income taxes, Massachusetts’s rule came as a result of the pandemic. New Hampshire does not have a tax on income.

New Hampshire’s decision to not have broad-based taxes is “central to its sovereign identity,” Governor Chris Sununu said Wednesday, summarizing his state’s complaint. “Massachusetts’ current position is a far cry from our country’s rallying call of ‘no taxation without representation,’ which they seem to have forgotten originated in their state.”

Massachusetts said its telecommute rule is temporary and due to expire when the governor declares an end to its pandemic state of emergency.

According to New York’s taxation website, any nonresident whose primary office is in the state but is telecommuting is still considered to be working in the state. Many states, including New Jersey, provide a tax credit to eliminate “double taxation” of a person’s income.

Such taxes “contain no mechanism to prevent double taxation if the taxpayer’s home state does not allow a credit,” New Jersey wrote in its brief. It “results not only in an unconstitutional windfall, but diverts the revenues that home states would otherwise receive.”

The case was filed under the Supreme Court’s original jurisdiction, which lets states sue one another directly at the nation’s highest court. Texas unsuccessfully tried to invoke the court’s original jurisdiction recently to overturn President-elect Joe Biden’s win in four other states.

The court could appoint a special master to take the first look at the case if it agrees to let the suit be filed.

The case is New Hampshire v. Massachusetts, 22O154.

©2020 Bloomberg L.P.

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