H.R. 1864: Mobile Workforce State Income Tax Simplification Act of 2011

H.R. 1864

Mobile Workforce State Income Tax Simplification Act of 2011

Date
May 14, 2012 (112th Congress, 2nd Session)

Staff Contact
Sarah Makin

Floor Situation

On Tuesday, May 15, 2012, the House is scheduled to consider H.R. 1864, the Mobile Workforce State Income Tax Simplification Act of 2011, under a suspension of the rules requiring a two-thirds majority for approval.  The bill was originally introduced on May 12, 2011, by Rep. Howard Coble (R-NC) and was referred to the Committee on the Judiciary.

Bill Summary

H.R. 1864 would prohibit the wages or other remuneration earned by an employee who performs employment duties in more than one state from being subject to income tax in any state other than:

(1)   The state of the employee's residence, and

(2)   The state within which the employee is present and performing employment duties for more than 30 days during the calendar year.

The bill would exempt employers from withholding of tax requirements and information reporting requirements for employees not subject to income tax under this the bill.  The bill would allow an employer to rely on an employee's determination of the time such employee will spend working in a state in the absence of fraud or collusion by such employee.

H.R. 1864 would exempt from the definition of "employee" professional athletes, professional entertainers, and public figures who are persons of prominence who perform services for wages or other remuneration on a per-event basis.

Background

According to the Committee on the Judiciary House Report 112-386, the Constitution grants Congress the exclusive power to enact legislation concerning matters that have a “substantial effect” on interstate commerce.  The Supreme Court has inferred from this grant of power that state and local laws are unconstitutional if they place an undue burden on interstate commerce—a principle commonly known as the “dormant” commerce clause.

As sovereign governments, states are generally free to set their own income tax policy, but they must do so in a way that does not place a substantial burden on interstate commerce.  As the American workforce is increasingly mobile, Congress has a constitutional duty to ensure that the disparity among states’ income tax policies does not stifle interstate economic activity.  Forty-one states currently impose a personal income tax on income earned within their borders regardless of whether the earner is a resident of the state.

In each of those states, not only must a nonresident employee pay tax after performing work for a certain amount of time or earning wages in the state, but the employee’s employer must withhold that state’s income tax on behalf of the employee and remit it to the state at the end of the year. The question, then, is whether compliance with 41 different states’ income tax and withholding laws places a substantial burden on employees who cross state lines to do their job.

Income tax and employer withholding laws vary significantly among jurisdictions.  Some states require an employer to withhold income tax on the first day of the employee's travel; others use a hybrid time-spent and dollars-earned test to trigger withholding.  For example, in New York, a non-resident's income tax liability is triggered the moment he or she earns wages in the state, but the employer's withholding requirement is not triggered until the 14th day of wage-earning.  A non-resident's income tax liability to Idaho is triggered after he makes $1,000 in wages in the state.

Employees are ultimately responsible to report their own income tax liability to a state.  Thus in each nonresident income tax state where an employee earns wages, he is required to fill out and file a tax return.  In the current system, each state sets its own de minimis threshold. E mployees who conduct only transient business or earn below a certain amount of wages in the nonresident state need not file a return or pay taxes.  The variation among state laws, however, means that an individual who is required to travel for work must track and comply with up to 41 different states' income tax laws, including the preparation of numerous tax returns to nonresident states in many of which he may ultimately be entitled to a refund.  This result may discourage employees who conclude that the burden of learning a nonresident state's income tax laws and filing a return there outweighs the opportunity to travel to the state for a few days to conduct business.

Furthermore, the complex patchwork of state income tax withholding laws creates an unnecessary administrative burden on small business employers—America’s job creators—who must comply with nonresident states' withholding laws on account of wages their employees earn in the state.

Businesses, including small businesses and family businesses, that operate interstate are subject to significant regulatory burden with regard to compliance with nonresident State income tax withholding laws.  These administrative burdens take existing resources from operational aspects of the business and may require the hiring of additional administrative staff or outside experts in order to meet the demands of compliance.

Even in the case of an employee who resides in one State and works throughout the year in another State, State and local tax withholding and reporting can be very complicated.  The employer has to verify the employee's State of residence, check whether the two States have a reciprocity agreement, analyze the tax laws of both States, and likely withhold tax for both States and prepare a form W-2 for both States.

The resources a small business must devote to income tax withholding compliance is generally offset by raising prices on the cost of goods and services the business sells to consumers.

Large businesses that employ thousands of people are also burdened by the cumulative effect of non-uniform state income tax laws.  The Sarbanes-Oxley Act of 2002 requires management to sign off on the internal controls that ensure state tax compliance and requires auditors to certify management's assessment.

The diversity of state income tax laws means that large public companies and their auditors must invest a significant amount of time ensuring that the company has withheld correctly for each employee at great expense to the firm.

The Mobile Workforce State Income Tax Simplification Act would substantially simplify state income tax law by imposing a uniform de minimis standard for nonresident taxation and employer withholding. 

Cost

According to the Congressional Budget Office (CBO), implementing the legislation would have no impact on the Federal budget. Enacting the bill would not affect direct spending or revenues, so pay-as-you-go procedures do not apply.

H.R. 1864 would impose an intergovernmental mandate as defined in the Unfunded Mandates Reform Act (UMRA) by prohibiting States from taxing the income of employees who work in the State for fewer than 31 days.  The mandate costs of H.R. 1864 would include any taxes that State governments would be precluded from collecting under the bill.

Most States that levy a personal income tax allow residents to take a credit for income taxes that the residents pay to another State.  The cost of the mandate would equal, for all States collectively, the difference between the amount of revenue that States receive from nonresidents who work in the State for fewer than 31 days and the amount they would receive from residents whose credits would be lower under the bill.  Generally, States that have large employment centers close to a State border would lose the most revenue; States from which employees tend to commute would gain revenue.  For example, New York would likely lose the largest amount of revenue-from $50 million to $100 million according to State and industry estimates-and Illinois, Massachusetts, and California would face smaller losses.  New Jersey and Connecticut would likely gain revenue.

Because of uncertainty about the amount of revenue that States collect from nonresidents, and the amount they would receive from residents whose credits would be lower under the bill, CBO cannot estimate the net cost of the mandate.  Consequently, CBO cannot determine whether the net cost of the intergovernmental mandate in the bill would exceed the annual threshold established in UMRA ($73 million in 2012, adjusted annually for inflation).