Politico is reporting this week that lawmakers are pushing to sort out a tax mess created by millions of people working from home during the coronavirus pandemic — amid rising fears that Congress will fail to reach a solution before tax filing season.
People who've been working in a state different from the one in which they normally work face potentially nasty headaches when they do their taxes next year, thanks to uncertainty over who should get their local tax dollars, Politico said.
Many lawmakers now want Congress to intervene to create a clear, uniform rule as part of their latest coronavirus relief efforts. The clock is ticking with next year's tax filing season set to begin later next month. It's yet another coronavirus problem in Congress' lap, though it hasn't gotten as much attention as others have.
Usually, states tax people based on where they live or where they work. But what happens when someone who normally works in an office in one state has spent the past nine months working from home in another? That's hardly unusual in large cities whose metropolitan areas spill across borders.
And with businesses increasingly comfortable with employees working elsewhere, some have decamped to vacation homes in other states.
It's even an issue within some states, with fights over whether cities should continue imposing commuter taxes on suburbanites who no longer have commutes.
States have been all over the map on how to deal with those situations, with border wars breaking out in some places. New Hampshire is suing Massachusetts, asking the US Supreme Court to strike down a Bay State rule that says people who usually work in Boston are still subject to its taxes even if they're working from home in southern New Hampshire.
“Massachusetts claims the authority to tax New Hampshire residents who earn their incomes from activities they undertake solely within New Hampshire,” the suit complains, calling the move unconstitutional.
In other places, it's a nonissue. In the Washington, D.C., area, for example, neighboring governments have longstanding pacts not to tax one another's residents regardless of where they work.
Polling shows many taxpayers are unaware of the looming problems, but some people could end up being double taxed by states. At the same time, some taxpayers now working in lower-tax states than the ones in which they normally work may spy an opportunity to save on their tax bills — which has many employers worried.
Most companies have continued to withhold state taxes from their employees' paychecks from the same place they always have, but some worry their workers will ask them to redo their tax forms so they can file somewhere else.
Congress normally steers clear of state tax issues, but Senate Republicans have called for a national fix as part of their draft of another coronavirus stimulus plan. Senate Majority Whip John Thune, R-S.D., said that “the need to fix the remote and mobile worker tax issue existed long before the pandemic began, but the urgency to address it has grown exponentially this year.”
House Speaker Nancy Pelosi, D-Calif., also has said she wants to address the issue. But Senator Chuck Schumer, D-N.Y., is key because the issue is especially touchy for New York which is “famously assertive about its right to tax visitors.
The state's budget relies heavily on taxes paid by nonresidents — they represent about 15% of its entire revenue take. More than half of that, about $3.7 billion, is paid by New Jersey residents.
“It's a huge issue for New York,” said EJ McMahon, a senior fellow at the Empire Center for Public Policy. “It has the most to lose from any attempt to restrict the current arrangement.” The state already has a longstanding rule to deal with people who have offices there but are actually working beyond its borders.
It essentially says that if someone is elsewhere because it's convenient for them — rather than because it's demanded by their job—then they are subject to New York taxes. The rule was adopted decades ago.
In Congress, lawmakers have considered various proposals, but many want to adopt a temporary rule that simply says people should continue to be taxed as they were before the pandemic began. That would seem to hold New York harmless, but it has a less obvious, risk: It could become a precedent that might come back to haunt the state.
That's because it would be highly unusual for the federal government to tell states how to tax people and lawmakers have been battling for years over how states tax mobile workers. So if Schumer agrees to a narrow coronavirus-specific fix now, that would underscore that such issues are fair game for Congress — which could provide ammunition later to lawmakers like Thune who've been pushing broader, more permanent changes that could curtail New York's power to tax nonresidents.
So, we will see. This is yet another important topic that is being added to the already long list of emergency issues arising from COVID. Since they often turn out to be tougher than expected, they should be watched closely as they emerge, Washington Insider believes.