(The Center Square) – New Hampshire is taking aim at a Massachusetts policy to tax Granite State residents’ income who work remotely for Bay State-based companies.
The Boston Herald reported in December that Massachusetts instituted the policy during the early days of the COVID-19 crisis to maintain revenues the state would normally garner from out-of-state employees physically working within their borders.
New Hampshire and Gov. Chris Sununu filed a lawsuit with the U.S. Supreme Court challenging the tax policy after Massachusetts Gov. Charlie Baker extended the mandate.
“Massachusetts has radically redefined what constitutes Massachusetts-sourced income in order to tax earnings for work performed entirely outside its borders,” New Hampshire Attorney General Gordon Macdonald said in the state’s latest submission to the Supreme Court, the Boston Herald reported. “This does not maintain the status quo. It upends it.”
Andrew Cline, president of the Josiah Bartlett Center for Public Policy, said there is a lot at stake in this lawsuit.
“New Hampshire has painstakingly over many decades created an economic engine in New England, and the basis of that is the absence of an income or sales tax and a very light touch on business and economic regulations,” Cline told Center Square. “The Massachusetts move to tax the income of everybody who works remotely for a Massachusetts company really does put that at risk because suddenly New Hampshire is no longer a tax refuge for New England.”
With the explosion of working remotely and its potential to become the norm, New Hampshire could become a haven for the whole eastern United States, Cline said.
New Hampshire isn’t the only state with something to lose.
Ohio, Arkansas, Indiana, Kentucky, Louisiana, Missouri, Nebraska, Oklahoma, Texas, Utah, New Jersey, Connecticut, Hawaii and Iowa all signed amicus briefs siding with New Hampshire supplicating the Supreme Court to hear the case.
Cline said one of the lawsuit’s underappreciated points is that it will set a dangerous precedent for other states. If Massachusetts gets away with this, other states will follow, he said.
“There are six states that tax remote workers in similar ways,” Cline said. “If [Massachusetts] wins and the Supreme Court allows a state to tax remote workers wherever they live regardless of having any physical nexus in the state, you will see states quickly passing laws to reach over their borders and tax everyone who they can claim is doing remote work in their states. And all of a sudden, tax competition among states is reduced.”
Massachusetts’ policy calls for taxing income New Hampshire residents would have earned commuting to the Bay State. So if a Granite Stater previously commuted to Massachusetts three days a week before the coronavirus crisis, Massachusetts taxes them for three days-worth of income earned working remotely.
The problem with this, Cline said, is as it stands, there is nothing he can see keeping states from applying this to all income earned by any employee they can construe to work for a company within their borders.
There are questions of constitutionality as well.
“Historically, you had to have, based on legal precedent and law, a physical nexus in that state for a state to justify taxing you,” Cline said. “The way Massachusetts has structured its remote workers’ tax that physical nexus is really removed or reduced to the point that it’s meaningless.”