As jobs move online and companies consider keeping some work remote even after the coronavirus pandemic, states are jockeying for the legal authority to tax the income of residents who telework for an out-of-state employer.

At stake is billions of dollars in tax revenue.

On Tuesday Hawaii joined more than a dozen states in filing a brief petitioning the U.S. Supreme Court to take up an October lawsuit filed by the state of New Hampshire that seeks to block Massachusetts from taxing its residents who no longer commute across state lines for work.

Kanu Hawaii Executive Director Keone Kealoha sits inside the Hub Coworking Hawaii space located in Kakaako.
Kanu Hawaii Executive Director Keone Kealoha works out of Hub Co-working Hawaii in Honolulu several times per week. Pandemic-related revenue losses, however, have forced the nonprofit organization to scale back its use of the Hub. Cory Lum/Civil Beat

The lawsuit claims that it is unconstitutional for Massachusetts to tax income “earned entirely outside its borders.”

The issue has national implications.

Six states tax people based on the location of their employer, even if they work remotely from another state. These tax rules are permanent in Arkansas, Delaware, Nebraska, New York and Pennsylvania, whereas the policy in Massachusetts is a new, temporary response to the coronavirus pandemic.

“The decision of six states to directly tax income of nonresidents working from home results not only in an unconstitutional windfall, but diverts the revenues that home states would otherwise receive,” reads the brief filed by Hawaii, New Jersey, Connecticut and Iowa.

“This is particularly troubling because … home states provide services to residents working at home — e.g., police and medical services — without collecting tax revenue. Yet that is the Hobson’s Choice to which they are put: doubly tax residents’ income or suffer fiscal consequences.”

Whether or not Hawaii can cash in on the rise of remote work will determine whether teleworking can soften the blow of prolonged tourism job losses.

The state’s Department of Business, Economic Development and Tourism is developing a series of initiatives to match unemployed Hawaii residents with remote jobs and to parlay the rise of remote work flexibility as a means to allow kamaaina living elsewhere to return home.

DBEDT is also supporting Movers & Shakas, a pilot project that aims to lure remote workers with mainland-based employment to choose Hawaii as their work-from-home location. In exchange for community service and a six-month commitment, the 50 program participants will earn free roundtrip airfare to Honolulu.

Beyond these coordinated efforts, Hawaii has organically attracted a rush of people with the ability to work remotely during the pandemic, a phenomenon that is driving up high-end real estate prices.

Stunning scenery, a temperate climate and low virus rates are driving this influx of out-of-state teleworkers.

Before you go

Civil Beat is a small nonprofit newsroom that provides free content with no paywall. That means readership growth alone can’t sustain our journalism.
 
The truth is that less than 1% of our monthly readers are financial supporters. To remain a viable business model for local news, we need a higher percentage of readers-turned-donors.
 
Will you consider becoming a new donor today?

About the Author