As teleworkers flit from city to city, they're creating a huge tax mess.
Why it matters: Our tax laws aren't built for telecommuting, and this new way of working could have dire implications for city and state budgets.
- "There’s gonna be a shakeout of what economic activity looks like and where it’s going to get done, and that’s going to require cities to rethink what their tax base looks like," says Kim Rueben of the Urban-Brookings Tax Policy Center.
The backdrop: By and large, Americans owe income taxes where they work, Rueben notes.
- Here's a good example: Professional baseball players owe tax money in the states where their away games take place.
- So if a New Hampshire resident is commuting to a Massachusetts-based company, that person will pay taxes to Massachusetts.
- If the worker is only commuting four out of five days a week, they'll owe Massachusetts taxes on four-fifths of their income, says Rueben.
The pandemic upended that system. Now, that same New Hampshire resident is following stay-at-home orders and working from home every day. So does that worker owe Massachusetts any tax money?
It's a huge question that has reached the Supreme Court.
- New Hampshire, which doesn't have an income tax, is suing Massachusetts for asking telecommuters to pay income taxes on work completed outside of Massachusetts.
- But Massachusetts is saying that work would have been done within its state if not for the pandemic and is asking out-of-state commuters to pay taxes on the days they would have come to the office.
New Jersey and Connecticut have backed New Hampshire's position, as those states are in a similar bind. They each have hundreds of thousands of residents who usually commute to New York City and pay New York state income tax as well as a New York City commuter tax, but have been working remotely this past year.
- In normal times, states like New Jersey credit their residents who commute to New York City so they don't have to pay income tax to New Jersey as well. Now, New Jersey is saying it shouldn't have to pay out that credit for the pandemic months during which its resident telecommuters didn't set foot in New York City for public safety reasons.
The big picture: The pandemic has exposed our tax laws' inability to handle remote work at scale — which is sure to be a permanent side effect of this time period.
- Even if people choose not to work from home 100% of the time, many will cut down the number of days in the office. That means they may move out of expensive cities and spend less time at local businesses.
- So in addition to potential income tax revenue loss, cities may see diminished property and sales tax revenue, too, says Jed Kolko, chief economist at the jobs site Indeed.
"While a lot of cities will be on the losing end of the revenue stick as taxpayers shuffle around the country, the one that's likely to be hit the hardest is San Francisco, where about half the professional workers live outside city limits (and are probably working from home) and lots are moving to cheaper places," Axios cities expert Jennifer Kingson tells me.
- The city has seen a 43% drop in sales tax revenues, and controller Ben Rosenfield warns that "permanent [job] relocations out of the San Francisco area could have a larger impact on the city’s tax base.'"
Go deeper: The Philly Inquirer has an excellent dive into what remote work could mean for city finances.