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Supreme Court Punts on State Tax Question About Remote Work


Today the Supreme Court announced it will not resolve a key question of state taxation: Should income tax dollars support where you work or where you live? By declining to hear a dispute between two New England states, the court maintains the current rule of “it depends.”

New Hampshire vs. Massachusetts involved Massachusetts’s decision to continue collecting income tax from New Hampshire residents while they worked at home (for Massachusetts companies) during the pandemic. The Granite State, or at least its governor, called this an “unconstitutional tax grab.” The Bay State maintained the arrangement merely continued the “status quo” of state taxation.

At issue were the tens of thousands of people who work in Massachusetts (home to lots of high-paying jobs), but live in New Hampshire (home to no state individual income tax). For decades these people have paid Massachusetts income tax because it (like other states) generally collects the tax based on where work is done and not where the worker lives. (Some states, such as Maryland, Virginia, and the District of Columbia, create reciprocity agreements, which are like a state income tax truce that keeps the tax in the worker’s residence state.)

Prior to the pandemic, these workers would calculate how much of their work was physically done in Massachusetts and pay state tax accordingly. However, when COVID-19 hit, many of these employees began working remotely from home in New Hampshire.

This change in location could have obviated their Massachusetts income tax liability, but Massachusetts immediately issued guidance in the spring of 2020 saying these remote employees still worked in Massachusetts for tax purposes during the pandemic. New Hampshire sued, saying its residents should not have to fund Massachusetts’s budget unless they physically worked in the state. By declining to hear the case, the Supreme Court effectively ruled for Massachusetts.

Notably, Massachusetts’s rule was temporary. When its governor lifted the state of emergency order earlier this month, he also ended the remote worker rule. In fact, the Biden administration argued the Supreme Court should not hear the case in part because these “pandemic-specific circumstances make this a poor vehicle in which to address the broader issues of interstate taxation.”

That comment was important for the six states, notably New York, that established rules to tax remote workers before the pandemic. Some hoped the high court would use New Hampshire’s case to end this practice for good.

In fact, 14 states—ranging from New Jersey to Utah—issued briefs siding with New Hampshire. As remote work becomes more common, these states do not want their residents sending tax dollars back to the state where their virtual office is located.

No state submitted a brief on behalf of Massachusetts, but we can assume New York had a favorite in this fight. Of course, Congress could resolve this but you can guess how that’s going.

The underlying policy issue is at the heart of much state and local taxation: the benefits principle. In short, one reason governments tax is to pay for services that benefit constituents. This is fairly simple at the federal level (Medicare taxes generally pay for Medicare benefits) but it gets more complicated for local jurisdictions.

The most direct tax-to-benefit policy is the property tax. To oversimplify a bit, the value of a homeowner’s property is related to the services its local governments provide (think good local schools) so property taxes fund those services. A similar relationship exists with gas taxes and transportation spending. If you buy gas in a state you travel through but don’t live in, it makes sense that your gas tax dollars help that state because you’re using its roads. 

But what about state income taxes? Are these meant to pay for government services benefiting where the worker lives or works? The worker needs schools, police, roads, and more for their home, but their business similarly needs these services to operate and employ workers.

As University of Chicago law professor Daniel Hemel, told Politico’s Morning Tax before the court’s announcement, a major obstacle for New Hampshire’s challenge was it does not tax income and thus doesn’t lose revenue when its residents pay tax to Massachusetts.

The Supreme Court did not explain why it rejected the case. But it is possible the justices agreed with Biden’s special circumstances argument and Hemel’s no-loss theory.

Therefore, an answer to the bigger question of interstate taxation may require, say, Connecticut challenging New York’s rule. The New York tax is permanent and costs Connecticut revenue because the Nutmeg State grants a tax credit to its residents who work—and pay taxes—in New York. The credit prevents the taxpayer from being double taxed but it costs Connecticut revenue that it thus cannot use to provide benefits to its residents.

Until the Supreme Court, or the Congress, resolves this, workers and states will have to navigate complex, unresolved tax issues created by an increasingly mobile workforce. 





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