Gov. Ned Lamont and the legislature’s Finance Committee are trying to shield thousands of residents with out-of-state employers from double taxation while Connecticut and its neighbors battle over fiscal policy in court.
Rep. Sean Scanlon, D-Guilford, who co-chairs the committee, said Tuesday that the bill crafted by the Lamont administration could save residents roughly $500 million this spring by clarifying that Connecticut residents who work in other states and pay income taxes to those states can get a credit for those taxes on their Connecticut returns.
“We want to make sure they [taxpayers] are able to sleep at night,” Scanlon said during a late-morning, live-streamed press conference. “We have to give confidence to the people that we have their back.”
At issue is the so-called “convenience rule,” which governs how residents file their income taxes when they live in one state but work in another.
For years, the general principle was that these commuters paid taxes first to the state where their job was. Connecticut residents who worked for an out-of-state company also had to file a return with Connecticut but could claim the taxes they paid to another jurisdiction as a credit.
Even before the pandemic, increasing technology made it possible for many of these former commuters to work from home. But that then raises the question of which state would have first claim to their income tax payments: They state where they live — and actually perform their remote work? Or the state where their employer is located, but to which they no longer commute physically?
New York and Massachusetts responded to this growing uncertainty several years ago by enacting legislation holding that telecommuters working from home for “convenience” still owed taxes to their employers’ home state.
Connecticut responded with its own convenience law in 2019, warning out-of-staters that they still owed taxes here if they work for a Connecticut company yet telecommute each day from home.
If this seems confusing, things got worse after the COVID-19 outbreak began last March, when the ranks of telecommuters swelled considerably.
Connecticut began negotiations with neighboring states, but the matter also is pending in federal court.
New Hampshire is battling Massachusetts over its convenience rule. New York has filed an amicus brief in support of the Bay State. Connecticut and New Jersey have filed briefs backing New Hampshire.
“We’re always willing to tax and negotiate,” Mark Boughton, Lamont’s commissioner of the Department of Revenue Services, told the CT Mirror. “It’s a lot cheaper and efficient. … But let’s make no mistake, New York is being the income tax bully here,” by refusing to be flexible with its tax laws during a pandemic, Boughton added. “We can’t let Connecticut residents pay the cost for that.”
A spokesperson for New York Gov. Andrew Cuomo could not be reached for comment Tuesday.
The stakes in this fight are huge.
Scanlon said Connecticut residents telecommuting to New York jobs would owe roughly $440 million in income taxes to Connecticut — were the General Assembly not to enact the new bill proposed by Lamont. And telecommuters to Massachusetts jobs would pay about another $60 million.
Boughton noted the state’s potential loss of revenue not paid to Connecticut is closer to $220 million when considering the offsetting income tax receipts Connecticut could gain from residents of other states who work remotely for companies here.
The state Department of Labor doesn’t track precisely how many residents work out of state. But it does record how many Connecticut residents have jobs. It also records how many people hold jobs with Connecticut employers, whether they live in this state or another. And the gap between those two tallies has been widening steadily since 2013.
Seven years ago, it was about 65,000 people. One month before the pandemic began, it topped 158,000.
And many economists predict that even after the coronavirus has been controlled, many jobs that converted to remote work during the pandemic will remain so because this has proven to be cost- and time-efficient.
Both Scanlon and Boughton said Connecticut is not forfeiting any revenue through this bill.
The state will continue to make its case in court. It simply doesn’t want its residents paying double taxes while the legal fight runs its course.
The proposal has the potential for strong bipartisan support.
House Minority Leader Vincent J. Candelora, R-North Branford, said he still needs to review the measure but praised the concept.
“I think, generally, Republicans are sympathetic with the issue posed by this for Connecticut taxpayers,” he said. “I would rather see the state of Connecticut defending its residents rather than having the residents have to take up that issue [in court] themselves.”