Connecticut signs onto tax fight against Massachusetts, New York in lawsuit targeting telecommuters; over $400 million at stake

If you live in Connecticut but work in New York, you end up paying income taxes in New York and receiving a credit from the state of Connecticut, known as the convenience rule. But what happens when a pandemic causes people to start working remotely from home?

That is the chief question in a lawsuit filed with the U.S. Supreme Court between the State of New Hampshire and the Commonwealth of Massachusetts, as New Hampshire seeks to block Massachusetts from imposing a “temporary” measure that would tax New Hampshire residents who are now working from home.

Connecticut and New Jersey have both signed onto an amicus brief in support New Hampshire, but their chief target is likely not Massachusetts but rather New York, where tens of thousands of their residents previously commuted to work before the pandemic. 

At stake is billions in tax revenue at a time when states are facing massive budget deficits brought on the COVID-19 pandemic and the closure of businesses.

Although New York is not a named defendant in the suit and has yet to file an amicus in support of Massachusetts, a court decision in favor of New Hampshire would put a big hole in the Empire State’s budget.

“Based on 2020 work-from-home rates with an estimate range of 44 percent to 57.7 percent, Connecticut may credit residents anywhere between $339 million and $444.5 million for income taxes they paid to New York, and $48.2 million and $63.2 million for income taxes paid to Massachusetts,” the brief says.

For New Jersey the income tax credits range past $1 billion per year.

“We do not believe that other states should tax Connecticut residents on income they earn while living and working from home or at an office in Connecticut,” wrote Elizabeth Benton, communications director for Connecticut’s Office of the Attorney General, in an email.

According to the brief, New York has already “made clear” that non-residents working from home due to the pandemic will still be taxed as if they worked those days in New York, noting that before the pandemic “up to 78,000 Connecticut residents” of Connecticut traveled to New York for work.

Connecticut likewise taxes nonresidents who work in the state if their home state has a similar tax, but the fact that Connecticut signed on to support New Hampshire rather than Massachusetts likely means Connecticut is losing far more revenue to residents working in New York and Massachusetts than vice-versa.

With the Metro-North train lines largely empty and employers normalizing telecommuting, the results of this lawsuit – if taken up by the Supreme Court – could have massive and long-lasting impact on state budgets.

According to the Tax Foundation, seven states, including Connecticut, impose a “convenience of the employer” rule – essentially taxing the employee based on where they work, not where they live. 

The Tax Foundation warned that during this time of telecommuting, some residents could end up facing double taxation as a state – like Connecticut – may count working from home in Connecticut as working in the state, while New York counts working from home in Connecticut as working in New York. 

Edward A. Zelinsky, a professor of law at the Benjamin N. Cardozo School of Law at Yeshiva University, has also filed an amicus brief with the Supreme Court in support of New Hampshire.

“Massachusetts cannot constitutionally tax New Hampshire residents working at home just as New York’s equivalent taxation of remote working Connecticut residents is unconstitutional,” Zelinsky said in an email

Zelinksy, a Connecticut resident, sued the State of New York in 2003 claiming they could not tax all of his income because he spent half the year working in Connecticut. His lawsuit was struck down by the New York Court of Appeals and the Supreme Court at the time declined to take the case. 

Since then, Connecticut congressmen, including Sen. Chris Dodd, Rep. Chris Shays and Rep. Jim Himes have repeatedly introduced legislation to address the issue, but the matter has never been addressed by Congress.

But if the Supreme Court takes up this case and New Hampshire is successful in its challenge, it could reset the tax tables in a big way for all states involved, particularly during the pandemic and post-pandemic recovery period.

New York, always aggressive in collecting tax revenue, is currently facing a budget deficit of $8 billion in just this fiscal year alone, while Massachusetts faces a budget shortfall that ranges from $2.7 billion to $5.3 billion. Neither state has enough reserve funds to bridge the gap.

Likewise, Connecticut is looking at a $4.3 billion deficit for the next biennium, New Jersey has a nearly $6 billion single-year deficit and New Hampshire is looking at an $80 million deficit for fiscal year 2021.

New Jersey has already raised taxes on its wealthy residents and corporations, while the governors of New York, Connecticut and Massachusetts have thus far avoided talk of tax increases, despite urging by labor and progressive coalitions to tax the rich.

New Hampshire – the “Live Free or Die” state – does not impose a state income tax on its residents, so the fight against Massachusetts attempt at an — albeit temporary — revenue grab may be more ideological in nature.

New Hampshire Governor Chris Sununu announced the lawsuit, saying Massachusetts is trying to balance its budget on the back of 80,000 New Hampshire residents who previously worked in Massachusetts but are now largely forced to work from home.

“We’re going to fight this unconstitutional attempt to tax our citizens every step of the way,” Sonunu said. “And we’re going to win.”

Andrew Cline, president of the Josiah Bartlett Center for Public Policy in New Hampshire, welcomed Connecticut’s support.

“It’s helpful to have Connecticut join New Hampshire in arguing against unconstitutional cross-border taxation before the Supreme Court,” Cline said. “Connecticut should have filed this challenge decades ago.”

The lawsuit was filed in U.S. Supreme Court because the claims “are serious and of national importance, and there are not sufficient alternative fora to hear them,” the brief states.

The states of Hawaii, Iowa, Texas, Ohio, Arkansas, Indiana, Kentucky, Louisiana, Missouri, Nebraska, Oklahoma and Utah have also joined in support of New Hampshire.