Congress must simplify complex state taxes for mobile workers

In today’s interconnected economy, many Americans travel across state lines as part of their jobs. Unfortunately, these workers and their employers often face an array of confusing and burdensome tax rules, due to the interaction of different states’ income tax systems. Congress can ease their burdens by passing the Mobile Workforce State Income Tax Simplification Act.

When an employee lives in one state and earns wages in another, both states have the right to tax the wages. The home state gives the employee credit for the tax paid to the work state, up to the amount of tax she owes at home on her out-of-state wages.

{mosads}That setup is a recipe for complexity and uncertainty. What does it mean to earn wages in a state? If an employee travels to a state to attend a conference or receive training, is part of her salary “earned” there? If so, how much? What about an employee who makes phone calls or answers emails while traveling through a state? The uncertainty affects employers as well as employees because the employer must withhold taxes for each state that seeks to tax an employee’s wages.

Some states have reached agreement with their neighbors not to tax wages paid to each other’s residents, but the majority of states have no such agreements. And some states refrain from taxing workers who are in the state for short intervals or who earn small amounts there, but other states allow no exceptions.

Because each state’s policies are different, employers and employees must sift through a complicated patchwork of state laws. To determine how much pay should be taxed in each state, employees may need to keep travel logs and payroll departments may need to make intricate calculations, even when only a small amount of tax is at stake.

At the end of the year, the employee files tax returns with each of the states in which she earned taxable wages, navigating each state’s idiosyncratic rules and its limits on nonresidents’ deductions. Then, she claims credit on her home-state return for the taxes paid to the other states.

In many cases, this rigmarole merely shuffles money around, with little change in revenue. If the work state’s tax is smaller than the home state’s tax, the employee gets a full credit against her home-state tax. Then there’s no change in the employee’s total taxes — some of the employee’s payment just ends up in the coffers of the work state rather than those of the home state. A typical state may reap little net gain — although it extracts money from nonresidents working within its borders, it must give its residents credit for the money other states extract from them.

The best and simplest way to eliminate these problems would be to tax wages only in workers’ home states, which is where they vote and receive key public services. There’s precedent for taxing income only in the taxpayer’s home state — that’s the normal rule for interest, dividends, and capital gains on financial assets.

The Mobile Workforce State Income Tax Simplification Act, which the House Judiciary Committee approved on March 22, wouldn’t go that far. But its common-sense rules would provide considerable simplification for employees and employers. The bill would bar a state from imposing income taxes on a non-resident’s wages unless she was physically present in the state for work on 31 or more days during the year.

These protections would not apply to professional athletes, entertainers, and a few other types of workers. The bill’s restrictions would impose little financial harm on state governments — the Congressional Budget Office estimates that the bill would reduce states’ aggregate tax collections by $55 million to $100 million per year, less than 0.01 percent of total state revenue.

The Judiciary Committee approved the bill with strong bipartisan support on a 19-2 vote. The House passed earlier versions of the bill by voice vote in May 2012 and September 2016. Twenty-one Republicans and 17 Democrats are sponsoring the Senate version of the bill.

Workers should be free to go where their jobs take them without them or their employers getting tripped up by complicated and unclear tax rules. The protections offered by the Mobile Workforce State Income Tax Simplification Act would provide that freedom to many of America’s workers.

Alan D. Viard is a resident scholar at the American Enterprise Institute, where he studies federal tax and budget policy. He previously served as a senior economist at the Federal Reserve Bank of Dallas and taught economics at Ohio State University. He has been a visiting scholar at the U.S. Department of the Treasury’s Office of Tax Analysis, a senior economist at the White House’s Council of Economic Advisers, and an economist at the Joint Committee on Taxation of the U.S. Congress.

The views expressed by contributors are their own and are not the views of The Hill.