Tax competition among the states is nothing new, but this year’s pandemic pressures have triggered a barroom brawl that the Supreme Court may have to quell – whether it wants to or not.
An aggressive move by Massachusetts to protect its revenue is the horse that may drag reluctant justices into this fight. The Bay State ordinarily collects considerable income tax from individuals who live in neighboring jurisdictions but who work in Massachusetts. Most of this revenue is generated in metropolitan Boston, which draws commuters from New Hampshire, Rhode Island and even Connecticut. There are also individuals who live in Vermont and New York but work in Massachusetts, mainly in the western part of the state.
Like all states with an income tax, Massachusetts taxes its residents on their income, regardless of where they earn or generate it. Nobody disputes its right to do so.
Nobody challenges Massachusetts’ prerogative to tax nonresidents on the income they earn from labor they perform within its borders, either. Typically, they would pay tax to Massachusetts on the wages they earn there. They could then claim an offsetting credit against the income tax they pay to their home state. Or at least, this is how it works for residents of Rhode Island, Connecticut, Vermont and New York, all of which tax wages similarly to Massachusetts.
But New Hampshire does not have an income tax on wages. What it does have is roughly 80,000 commuters who ordinarily travel to offices in the Boston area, but who have been working from their homes since the pandemic lockdowns began in March. As nonresidents who were no longer working in Massachusetts, they no longer owed taxes to that state – until Massachusetts lawmakers hastily changed the rules.
Fearing the loss of tax dollars, legislators imposed a version of the “convenience of the employer” rule. A handful of other states, most notoriously New York, had instituted this rule before the pandemic. Massachusetts avoided the existing label, but the rule had a similar effect: It stated that if the employee previously worked in Massachusetts but was now working remotely, the employee’s wages would continue to be taxable in Massachusetts.
Why? Well, because they want the money.
To state officials in New Hampshire, this was not a satisfactory answer. They have taken their beef with Massachusetts directly to the U.S. Supreme Court. This shortcut is the constitutional route to settling disputes between the states. A variety of states have filed briefs in support of New Hampshire. Massachusetts has filed a reply in turn urging the justices not to take the case, on grounds that aggrieved New Hampshire residents can bring their complaints to Massachusetts courts.
I don’t expect this argument to fare particularly well. I think the justices will find that New Hampshire has standing to challenge Massachusetts on its own behalf, as well as in defense of its citizens. Massachusetts seeks to siphon tax dollars that New Hampshire could otherwise claim for itself. And since the dollars are associated with income that is neither earned in Massachusetts nor which belong to its residents, Massachusetts’ claim is about as justified as that of a distant relative who vainly hoped to be remembered in a rich relative’s last will and testament. As New Hampshire’s petition points out, Massachusetts’ cash grab also undermines “an incentive for businesses to locate capital and jobs in New Hampshire, a motivation for families to relocate to New Hampshire’s communities, and the State’s ability to pay for public services by reducing economic growth.”
The Supreme Court has avoided this issue in the past, when individual taxpayers tried to challenge New York’s self-serving, factually challenged definition of income earned within its borders. But I expect it will be hard-pressed to do so in a case brought by one sovereign state against another. Then again, being a Supreme Court justice means never having to say you’re sorry for denying a writ of certiorari.
New York treats income earned at home by a nonresident as having come from New York unless the work performed at home is for the “convenience of the employer.” You would think working at home during a pandemic, when most offices shut down, is a clear example of working at home for the convenience of the employer. But according to guidance New York released this fall, you would be wrong. The rationale boils down to the same one used in Massachusetts: New York wants the money.
New York’s neighboring states of Connecticut and New Jersey have sided with New Hampshire in its Supreme Court bid. New York has been silent, as of this writing. It is probably trying to come up with a more convincing way of saying “We want the money.”
Congress could someday resolve this issue, along with other sticky interstate tax questions, such as defining exactly when and how someone can get tax-hungry states like New York and California to stop claiming them as a resident. But don’t hold your breath, especially if the leadership in the upcoming Congress includes both House Speaker Nancy Pelosi of California and Sen. Charles Schumer of New York. That said, this is not a problem that will go away as the pandemic ebbs. While many workers will return to the office, many others are likely to keep working from home now that companies have observed the upside of offering workers such flexibility.
The conservative majority on the Supreme Court prefers to leave legislating to legislators. New Hampshire’s brawl with Massachusetts requires no legislation, however. It simply demands a recognition that a state should only be able to tax residents of another state when the nonresidents avail themselves of its services.
The timing is embarrassing for the justices. In 2018’s South Dakota v. Wayfair, they reversed their own quarter-century-old holding that physical presence was required for a state to mandate sales tax collection by an out-of-state business. Now they may have to find a way to distinguish that decision’s logic from the even more blatant, but conceptually similar, Massachusetts money grab.
Or they may just shut the window on New Hampshire and its citizens. As I said, being a Supreme Court justice means never having to say you’re sorry for denying certiorari.
Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book,
The High Achiever’s Guide To Wealth. His contributions include Chapter 1, “Anyone Can Achieve Wealth,” and Chapter 19, “Assisting Aging Parents.” Larry was also among the authors of the firm’s previous book
Looking Ahead: Life, Family, Wealth and Business After 55.
Posted by Larry M. Elkin, CPA, CFP®
Boston. Photo by John Feinberg, licensed under CC BY.
Tax competition among the states is nothing new, but this year’s pandemic pressures have triggered a barroom brawl that the Supreme Court may have to quell – whether it wants to or not.
An aggressive move by Massachusetts to protect its revenue is the horse that may drag reluctant justices into this fight. The Bay State ordinarily collects considerable income tax from individuals who live in neighboring jurisdictions but who work in Massachusetts. Most of this revenue is generated in metropolitan Boston, which draws commuters from New Hampshire, Rhode Island and even Connecticut. There are also individuals who live in Vermont and New York but work in Massachusetts, mainly in the western part of the state.
Like all states with an income tax, Massachusetts taxes its residents on their income, regardless of where they earn or generate it. Nobody disputes its right to do so.
Nobody challenges Massachusetts’ prerogative to tax nonresidents on the income they earn from labor they perform within its borders, either. Typically, they would pay tax to Massachusetts on the wages they earn there. They could then claim an offsetting credit against the income tax they pay to their home state. Or at least, this is how it works for residents of Rhode Island, Connecticut, Vermont and New York, all of which tax wages similarly to Massachusetts.
But New Hampshire does not have an income tax on wages. What it does have is roughly 80,000 commuters who ordinarily travel to offices in the Boston area, but who have been working from their homes since the pandemic lockdowns began in March. As nonresidents who were no longer working in Massachusetts, they no longer owed taxes to that state – until Massachusetts lawmakers hastily changed the rules.
Fearing the loss of tax dollars, legislators imposed a version of the “convenience of the employer” rule. A handful of other states, most notoriously New York, had instituted this rule before the pandemic. Massachusetts avoided the existing label, but the rule had a similar effect: It stated that if the employee previously worked in Massachusetts but was now working remotely, the employee’s wages would continue to be taxable in Massachusetts.
Why? Well, because they want the money.
To state officials in New Hampshire, this was not a satisfactory answer. They have taken their beef with Massachusetts directly to the U.S. Supreme Court. This shortcut is the constitutional route to settling disputes between the states. A variety of states have filed briefs in support of New Hampshire. Massachusetts has filed a reply in turn urging the justices not to take the case, on grounds that aggrieved New Hampshire residents can bring their complaints to Massachusetts courts.
I don’t expect this argument to fare particularly well. I think the justices will find that New Hampshire has standing to challenge Massachusetts on its own behalf, as well as in defense of its citizens. Massachusetts seeks to siphon tax dollars that New Hampshire could otherwise claim for itself. And since the dollars are associated with income that is neither earned in Massachusetts nor which belong to its residents, Massachusetts’ claim is about as justified as that of a distant relative who vainly hoped to be remembered in a rich relative’s last will and testament. As New Hampshire’s petition points out, Massachusetts’ cash grab also undermines “an incentive for businesses to locate capital and jobs in New Hampshire, a motivation for families to relocate to New Hampshire’s communities, and the State’s ability to pay for public services by reducing economic growth.”
The Supreme Court has avoided this issue in the past, when individual taxpayers tried to challenge New York’s self-serving, factually challenged definition of income earned within its borders. But I expect it will be hard-pressed to do so in a case brought by one sovereign state against another. Then again, being a Supreme Court justice means never having to say you’re sorry for denying a writ of certiorari.
New York treats income earned at home by a nonresident as having come from New York unless the work performed at home is for the “convenience of the employer.” You would think working at home during a pandemic, when most offices shut down, is a clear example of working at home for the convenience of the employer. But according to guidance New York released this fall, you would be wrong. The rationale boils down to the same one used in Massachusetts: New York wants the money.
New York’s neighboring states of Connecticut and New Jersey have sided with New Hampshire in its Supreme Court bid. New York has been silent, as of this writing. It is probably trying to come up with a more convincing way of saying “We want the money.”
Congress could someday resolve this issue, along with other sticky interstate tax questions, such as defining exactly when and how someone can get tax-hungry states like New York and California to stop claiming them as a resident. But don’t hold your breath, especially if the leadership in the upcoming Congress includes both House Speaker Nancy Pelosi of California and Sen. Charles Schumer of New York. That said, this is not a problem that will go away as the pandemic ebbs. While many workers will return to the office, many others are likely to keep working from home now that companies have observed the upside of offering workers such flexibility.
The conservative majority on the Supreme Court prefers to leave legislating to legislators. New Hampshire’s brawl with Massachusetts requires no legislation, however. It simply demands a recognition that a state should only be able to tax residents of another state when the nonresidents avail themselves of its services.
The timing is embarrassing for the justices. In 2018’s South Dakota v. Wayfair, they reversed their own quarter-century-old holding that physical presence was required for a state to mandate sales tax collection by an out-of-state business. Now they may have to find a way to distinguish that decision’s logic from the even more blatant, but conceptually similar, Massachusetts money grab.
Or they may just shut the window on New Hampshire and its citizens. As I said, being a Supreme Court justice means never having to say you’re sorry for denying certiorari.
Related posts:
The views expressed in this post are solely those of the author. We welcome additional perspectives in our comments section as long as they are on topic, civil in tone and signed with the writer's full name. All comments will be reviewed by our moderator prior to publication.