Why Congress should pass the Multi-State Worker Tax Fairness Act

On 17^th May, a massive fire caused Metro-North Railroad to reduce its commuter train service to and from Grand Central terminal. In light of this service disruption, the Metropolitan Transportation Authority, which operates Metro-North, “encouraged” commuters “to consider working from home.”

An out-of-state commuter who followed this sensible advice will be doubled taxed by New York for working at her home. Under its so-called “convenience of the employer” doctrine, New York imposes income taxes on a day when a nonresident works at her out-of-state home for a New York employer. Since the state of residence can legitimately tax its resident’s income on this work-at-home day, the upshot is often double income taxation, as the Empire State inappropriately taxes income earned outside its borders.

Only weeks before this most recent train service disruption, members of the Connecticut congressional delegation reintroduced legislation to bar New York and other states from using the “convenience of the employer” rule to tax income earned outside New York’s borders. In the Senate, Senator Richard Blumenthal, supported by his Connecticut colleague Senator Christopher Murphy, introduced the Multi-State Worker Tax Fairness Act of 2016. In the House, Representative James Himes introduced the Act as well.

If enacted into law, the Multi-State Worker Tax Fairness Act would prevent any state, most prominently New York, from taxing employees’ incomes on days when they work at their out-of-state homes. On such work at home days, these nonresidents do not set foot in New York State and use no New York services. On these days, these employees are receiving all their public services from their home state and its localities. As a matter of tax policy and constitutional law, there is no persuasive justification for New York’s taxation of income earned outside New York’s borders.

In the House, Representative Himes was joined as co-sponsors, not only by his Connecticut colleagues Representative Elizabeth Esty and Representative Rosa DeLauro, but also by Representative Scott Garrett of New Jersey and Representative Chellie Pingree of Maine. Their co-sponsorship of the Multi-State Worker Tax Fairness Act reflects the important fact that New York increasingly taxes the incomes of telecommuters who work at their homes throughout the country.

Consider, for example, the case of Thomas Huckaby of Nashville, Tennessee. Mr. Huckaby is a computer programmer. In 1994 and 1995, Mr. Huckaby spent three-quarters of his work days at his home in the Volunteer State. He worked the other one-quarter of his time in New York.

No one doubts that New York can legitimately tax the one-quarter of Mr. Huckaby’s salary that he earned in New York. However, under its employer convenience rule, New York taxed Mr. Huckaby’s entire salary including the income Mr. Huckaby earned while working at home in Nashville.

When Mr. Huckaby’s case reached the Court of Appeals, New York’s highest court, three of the court’s judges agreed with Mr. Huckaby. New York’s taxation of the income Mr. Huckaby earned in Tennessee, these judges declared, “violates the Due Process Clause of the United States Constitution.”

Unfortunately, four judges concluded otherwise and thus condoned New York’s extraterritorial income taxation of the salary Mr. Huckaby earned working at his home in Tennessee.

The Multi-State Worker Tax Fairness Act would overturn this result, requiring New York (and other states) to only tax employees’ salaries earned within the taxing state. As the Huckaby dissenters noted, this is the correct result as a matter of constitutional principle. It is also the correct result as a matter of tax policy: as on a day when a state provides no benefits to a nonresident working at home, that state has no legitimate claim to tax the income earned outside its borders.

New York Governor Andrew Cuomo proclaims that he no longer wants New York to be “the tax capital of the nation.” The Governor can take an important step in that direction by renouncing New York’s extraterritorial and unconstitutional income taxation of nonresidents under the employer convenience rule.

To date, however, Governor Cuomo has shown no interest in rationalizing this unreasonable feature of New York law. Accordingly, Congress should pass the Multi-State Worker Tax Fairness Act to prevent the unconstitutional and unwise double state income taxation of nonresidents who telecommute from their homes.

Featured image credit: Subway NYC, Brooklyn by Foundry. CC0 public domain via Pixabay.