Millions of Americans have been forced into new remote work arrangements during the coronavirus health crisis. The health risks are paramount, but day-to-day challenges like video conferencing and children’s education have made the situation even harder for remote workers. And absent action from Congress, remote work can have consequences for these taxpayers’ wallets as well.
Lockdowns, social distancing guidelines, care for sick loved ones and other reasons have seen Americans begin working in a state other than their normal work site since the onset of the pandemic. They may not be aware, however, that doing so could expose them to income tax filing and payment obligations in different states.
Approximately 3.5 million Americans could potentially run afoul of these rules and face additional tax obligations, based on surveys of Americans switching to remote work and census data of pre-pandemic interstate commuters. This number could potentially be even higher, as taxpayers who reside in the same state as their work offices could still face new tax obligations if they work temporarily somewhere else. For Arizona specifically, this could mean more than 49,000 Arizonans facing these new tax obligations.
Absent action from Congress, this can have real consequences. Not only do they have to face the already substantial burden of record-keeping and updating withholding at a time when most Arizonans have greater things to worry about, but working remotely in higher-tax states could lead to an unpleasant surprise when it comes time to file taxes next year.
Even Good Samaritans are not safe from the tax man. When tens of thousands of out-of-state health care workers put themselves at risk by volunteering to travel to New York City, answering its pleas for aid during the pandemic, they thought they were doing a good deed. But New York has made clear that it will move aggressively to tax the income of these volunteers, with Gov. Andrew Cuomo claiming that the state was “not in a position to provide any subsidies right now.”
Such actions are unfortunately unsurprising given New York’s status as a high-tax state that is known for rigidly pursuing every tax dollar from people who do work in the state. An analysis of what kinds of taxes that some of these health care emergency workers may face when doing remote work in New York found that a registered nurse may see a $750 tax increase, and an ER doctor could face as much as a $1,200 tax hike. Though New York is just one state aggressively pursuing remote workers’ tax revenues, the increased burden other states’ taxpayers can face from being subjected to its tax regime shows the danger of failing to rein in similarly aggressive states.
And for Arizona taxpayers who normally work in one of a few states, this can work the other way as well. Arkansas, Connecticut, Delaware, Nebraska, Pennsylvania, and (of course) New York enforce a so-called convenience of the employer rule. This means that Americans who normally work in one of these states but switched to working in Arizona for any reason other than absolute necessity can still face tax liability in that state. Often, those wages get double-taxed, meaning that they can face tax bills on the same income from Arizona as well.
The tax consequences of paying double state income taxes can be catastrophic to taxpayers trying to get by in a recession and a pandemic. A taxpayer making just over $42,000 a year splitting time between Connecticut and New York could see a tax increase of nearly $1,400.
Arizona small- and medium-sized businesses can face difficulties from these rules as well. Because just one employee working in a state can expose a business to tax obligations in that state, employees working remotely can create headaches for business tax compliance, including the need to file in additional states or apportion their taxes differently. Not only is this an additional compliance burden, but it could discourage businesses from following public health guidelines and allowing employees to work remotely.
The good news is that these are eminently solvable issues. U.S. Sen. John Thune, R-S.D., introduced bipartisan legislation that would address all these problems by limiting states’ ability to go after the income of remote workers, volunteers, and businesses on the basis of COVID-induced remote work. The Senate’s Phase Four proposal also included a version of this legislation that would likewise address the problem of states aggressively taxing remote workers.
Arizonans have enough on their plates in the middle of the pandemic without having to fend off overly aggressive tax bureaucrats. U.S. Sen. Martha McSally should take the lead in protecting Arizonans from unnecessary tax and filing obligations and support efforts to address taxation of remote workers.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.