The U.S. Supreme Court declined Monday to take up a lawsuit New Hampshire filed challenging Massachusetts’s application of its income tax on residents working remotely from other states during the pandemic, a case that financial analysts said could have resulted in “the reallocation of billions of income tax dollars between certain states.”
In October, the Granite State sued Massachusetts’s Department of Revenue over a pandemic-era policy imposing income tax on out-of-state residents who are working remotely for Massachusetts businesses, with Gov. Chris Sununu declaring the policy a “direct attack” on his state’s sovereignty and its appeal as an income tax-free state.
“All compensation received for services performed by a non-resident who, immediately prior to the Massachusetts COVID-19 state of emergency was an employee engaged in performing such services in Massachusetts, and who is performing services from a location outside Massachusetts due to a Pandemic-Related Circumstance will continue to be treated as Massachusetts source income subject to personal income tax,” the Mass. DOR declared in an emergency regulation initially put into place last July as telecommuting was widely adopted and work became separated from the workplace for many people.
As of 2017, there were more than 103,000 New Hampshire residents working for Massachusetts-based companies, representing more than 15 percent of all New Hampshire workers, the state said in its complaint. A major credit rating agency pointed to an analysis from a New Hampshire economic advisor that estimated that Massachusetts collects about $1.2 billion from New Hampshire residents who work remotely but are employed by an organization located in Massachusetts.
“Massachusetts’ actions undermine New Hampshire’s efforts to maintain attractive economic conditions that motivate new businesses and workers to relocate to the State and existing businesses to expand within the State,” New Hampshire wrote in its complaint.
The country’s high court on Monday denied New Hampshire’s motions for leave to file bills of complaint, though the order noted that Associate Justices Clarence Thomas and Samuel Alito would have granted the motions.
Had the Supreme Court taken the case and decided it in favor of New Hampshire, Massachusetts and five other states that tax out-of-state residents for income earned working from home — Arkansas, Delaware, Nebraska, New York and Pennsylvania — could have lost billions of dollars in tax revenue to states where many residents commute out of state for work, like New Jersey, Connecticut, Hawaii and Iowa.
“New Jersey calculates that in 2018 it credited more than $2 billion to resident taxpayers who worked for out-of-state employers, virtually all of which is attributable to New York City employers, and of which $100 million–$400 million of the credit was for work performed by New Jersey residents working remotely. Once the pandemic began, New Jersey estimates the work-from-home rates ranged from 44% to 58%, indicating a loss of tax revenue of $928.7 million-$1.2 billion to New York for the 12-month period beginning March 2020,” S&P Global Ratings wrote in a January report on New Hampshire’s then-pending motion. “The potential new revenue from a favorable ruling could be significant compared with the $36 billion of 12-month operating revenue New Jersey has budgeted for fiscal 2021. Using a similar analysis, Connecticut estimates it will lose $339.0 million–$444.5 million of 2020 income tax revenue to New York State.”
In a brief filed by New Jersey, Connecticut, Hawaii and Iowa, the states that potentially stood to gain from a SCOTUS ruling in favor of New Hampshire said the court’s decision “has far-reaching implications as to which States will collect billions in revenue during the pandemic — whether the States that unlawfully tax nonresidents working from home or the Home States” and that the court’s ruling “will remain critical well after the pandemic ends” because of the states that, unlike Massachusetts, did not tie their tax rules for remote workers to the end of the COVID-19 state of emergency.
S&P Global Ratings said that, if the Supreme Court declined to take up New Hampshire’s case, it expected “similar challenges to reappear.”
The Biden administration, in a brief filed by Acting Solicitor General Elizabeth Prelogar, suggested that the Supreme Court should deny New Hampshire’s motion because “the issues New Hampshire seeks to present can adequately be raised and litigated by New Hampshire residents who are subject to the Massachusetts income tax” and while the Granite State might “prefer that its residents not pay personal income taxes to any government, an independent tax obligation falling on a State’s residents generally is not an injury to that State’s own sovereign prerogatives.”
With the second half of June still to be counted, Mass. DOR has collected $32.454 billion in tax revenue so far in fiscal year 2021, which ends June 30.
That’s $3.364 billion more than the Baker administration’s most recent estimate for the full 12-month fiscal year and $1.3 billion more than the pre-pandemic estimate of $31.15 billion in tax revenue for fiscal year 2021. It is also $2.334 billion more than the consensus revenue agreement of $30.12 billion the governor, House and Senate used to craft their fiscal year 2022 budget proposals.
