Having trouble withholding for employees traveling from state to state? Congressional help might be on the way
Tuesday August 15th, 2017
Estimated time to read: 2 minutes, 45 seconds
The House has passed a bill designed to simplify the tax process for employees who work across state lines frequently or travel for business and make it easier to avoid paying income taxes outside their state of residence.
Under the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393), a state would be prohibited from imposing income tax on nonresident employees who work in that state only for 30 days or less. Only after this 30-day threshold is reached would existing state tax laws for nonresident income kick in for these employees. This mandate would not apply to professional athletes, entertainers, or public figures, who are typically taxed on a per-event basis.
Proponents of the legislation herald it as an ideal way to fix a problem impacting millions of workers. The goal of the bill is to clarify, simplify and streamline state tax compliance for employers and employees who work across state lines. This is seen as hugely important for an increasingly mobile economy. Workers who do a lot of business travel would benefit from this bill—as would the companies that employ them. Additionally, H.R. 1393 would resolve inconsistencies between state tax laws by creating a uniform standard.
Major supporters of the proposed policy include the American Institute of CPAs (AICPA), the Council on State Taxation (COST), Americans for Tax Reform, & the Computing Technology Industry Association (CompTIA).
Impact on states
The bill would likely have both positive and negative impact on individual states as well as the collective union. As an unfunded mandate, H.R. 1393 would impose new federal restrictions that would require states to make major changes to their existing tax codes.
Currently, of the 41 states that have a general income tax, 20 have laws on the books requiring nonresident employees be subject to withholding on the first day of travel within the state. The other 21 states have varying laws with different thresholds and requirements governing the taxation of nonresident employees.
In Georgia, for example, liability kicks in for employees who worked in the state for more than 23 days during the year, or employees who earn $5,000 or more or 5% or more of total income that is attributable to the Peach State. (The remaining nine states do not have a general income tax at all.)
Additionally, creating a uniform standard for this type of taxation would likely benefit some states financially. On April 10, the Congressional Budget Office published a report on H.R. 1393. According to the CBO, the bill would generate tax revenue in states like New Jersey, which has a high percentage of workers commuting to and paying income taxes in New York.
Logically, though, states like New York, Illinois, Massachusetts and California would net losses with the enactment of this legislation. The CBO reports estimates that New York would end up the biggest loser in this scenario, suffering revenue losses between $55 million and $120 million per year. When it comes to examining revenue for all states collectively, the bill would “reduce net revenues by $55 million to $100 million per year beginning in 2020,” the CBO said. On the federal level, the CBO does not anticipate the bill would have any direct effect on the federal budget, nor would it “increase net direct spending or on-budget deficits in any of the four consecutive 10-year periods beginning in 2028.”
Will it pass?
With broad bipartisan support in Congress and lack of vocal opposition, the Mobile Workforce State Income Tax Simplification Act seems like a likely vehicle for much-demanded tax reform. It’s worth noting, however, that there have been prior attempts to enact this legislation. Just a year ago, the Mobile Workforce State Income Tax Simplification Act of 2015 (H.R.2315) was passed without amendment by the House but got no further.
Now, though, with the Trump administration pressing Congress on tax reform, the 2017 version of the bill may have a better shot than its predecessor. Enacting even a small piece of tax reform legislation could be seen as a baby step toward a bigger package of tax legislation. Not only that, but passing this bill—or any bill, for that matter—would be great optics for Congress. But since going into the August recess the major focus is on healthcare, this bill may fail to capture the Senate’s attention to the extent necessary to enact it.
iSolved currently supports state reciprocity when employees work in multiple states. If this bill does pass, there are details, such as how to count the number of days, that would need to be clarified. The iSolved team monitors legislative updates closely to meet the requirements as laws are enacted.