Current situation and the problem defined
With today’s interconnected economic system, where the workforce is highly mobile, it is necessary for employees to travel to various states in the country as a part of their jobs. Presently, employees who travel to various states other than their state of residence as a part of their work must face a complex tax regime and a maze of complicated paperwork. This is because the employees are legally required to file an income tax return in every other state that they have visited, even if for a single day. This is in addition to filing federal and resident state income tax returns. Such employees and their employers must face a barrage of outdated, complex and sometimes contradicting nonresident state income tax laws.
This problem has been recognized for long by U.S. lawmakers and to alleviate this problem, the Mobile Workforce State Income Tax Simplification Act has been introduced in the House and Senate, enjoying bipartisan support and would help in streamlining and simplifying the present complex tax system. This will make it far easier for the employees and employers to comply with the tax laws, especially when they travel for work. To ease the pains of multi-state payroll and to comply with the tax laws, mobile workforce bill can give the much-needed reprieve.
The mobile workforce bill, given the nomenclature S.604, has been introduced in the 116th U.S. Congress on 28th February 2019. This bill has been introduced various times since the year 2006 but has faced many obstacles before it could be passed as a law. If this act is passed, it will grant a 30-day threshold on inter-state taxation before a state could tax the income of a non-resident employee. This threshold translates into a significant advantage for the traveling employees as they would be exempt from paying taxes until a safe period of 30 days. This period of 30 days is not continuous, so an employee can make various trips to a state in this timeframe. Once the limit of 30 days is reached, the taxes are considered from the first day an employee had started working in that state. To know more about the taxation structure in the United States, click here
Tax compliance on the stake
A big relief that the mobile workforce bill intends to provide is that a simplified and uniform multistate tax law would replace the current confusing and cumbersome laws that are different for various states. Data collected from various surveys point out to the fact that most of the U.S. workforce has traveled for work during a span of one year and visited three or more states for their work-related duties. However, since the current tax laws concerning the mobile workforce are complicated and diversified, with different states having different laws and limits to follow, the process of filing tax returns becomes complicated for the employees. This highlights the issue of tax compliance, and interstate workers don’t end up paying taxes in all the places they have traveled and worked. So, they may be committing a tax fraud without their knowledge, a kind of situation that can have major adverse consequences for the interstate workers if the non-compliance is detected by the authorities.
And the state governments are becoming more aggressive with their interstate tax laws, and are pressing the employees for compliance. The most pathetic part of this situation is that most of the employees don’t even realize that they are breaking the law or evading taxes by not filing taxes in all the states they have traveled for work. It is not that employees don’t want to pay taxes, it is just that the law is far too complicated. The compliance can be increased manifold if the laws are streamlined and standardized across the country, thereby reducing the compliance costs and the heaps of paperwork for everyone involved. This is the crux of the argument of the lawmakers those who are supporting this bill.
Obstacles facing the bill
However, the bill faces many obstacles in its path before it is passed as a law. Since the very beginning, this bill is facing stiff opposition from states like New York, California, Massachusetts, and Illinois and this has prevented the bill to get passed by the lawmakers. The reasons for this opposition being that these states would have to face huge financial losses if the mobile workforce bill is turned into a law. The cities in these states, for example, New York, are popular destinations for professionals and workers across the country as meeting places. It is estimated by the Congressional Budget Office that New York state stands to lose anywhere between $100 million to $120 million every year if this bill is passed as a law. On the other hand, states like New Jersey are poised to gain revenue since they have a huge worker population that commutes out of the state.
On the other side of the spectrum, supporters of the mobile workforce bill state that the net impact of this bill on the tax receipts of the states are minimal. As per different studies, 25 states will gain revenue or have no loss if the mobile workforce bill is enacted, and 22 states will be impacted minorly due to the provisions stated in this bill. Although it has been pointed out that the mobile workforce bill faces an uphill task before being passed into law, all is not lost for the supporters of this bill. The supporters of this bill state that red tape for America’s workforce should be cut for the overall economy and tax filing process of the states should be simplified for the welfare of the American workforce and economy. This gives hope to the highly mobile American workforce, who stand to gain the most should the mobile workforce bill be passed.