Federal Tax Case for Commuters a $400+ Million Query for Connecticut

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Federal Tax Case for Commuters a $400+ Million Question for Connecticut

In 2018, 86,606 Connecticut residents paid $1.35 billion in New York state income taxes, according to the Empire Center.

That was lost revenue for Connecticut – because the state credits residents for taxes paid out of state – but it also made sense. They commuted to New York, worked in New York, and were paid in New York. 

In March 2020, that all changed. 

With restrictions in place to limit the spread of COVID-19, thousands of workers who typically commuted across state lines were told to work from home. 

As for their taxes? It’s now unclear which state has the right to collect them — but a case filed by New Hampshire with the U.S. Supreme Court may soon resolve the issue, with potentially billions of dollars at stake.

A longstanding issue

For decades, Ed Zelinsky rode Metro-North from New Haven to Manhattan three days a week. The other two days – or 40 percent of his workdays — he worked from home in Connecticut. 

But when tax season came around, Zelinsky paid income tax on 100 percent to the state of New York — a loss of revenue for Connecticut and an increased tax burden for Zelinsky. So in 2003, he challenged the practice.

“I brought my case with the support of Connecticut and Dick Blumenthal, who was Attorney General at the time,” Zelinsky told CT Examiner.

Zelinsky argued in court that he — and any other individuals who worked from home – should be taxed by the state where they performed the work. For Zelinsky, that would mean that 60 percent of his income would be taxed by New York and 40 percent by Connecticut. 

The New York state courts didn’t buy the argument. 

Instead, the courts ruled that Zelinsky was working at home as a convenience, and that he was still performing the work for a New York-based employer. 

“Nobody was surprised when New York courts didn’t adhere to the constitution,” Zelinsky said. 

The state would have lost a significant amount of money.

But in 2020, the state would stand to lose billions of dollars. According to the Empire Center, New York would lose up to 15 percent of its income tax revenue. 

“You were working at home for your own convenience, the employer did not tell you to stay there,” Richard Pomp, a professor specialized in tax law at the University of Connecticut law school, explained of prior years. But this year it’s different. Instead of a convenience, employers are requiring their employees to work remotely

A federal issue

Connecticut isn’t the only state that formerly sent thousands of residents across state lines for work each day. New Hampshire and New Jersey also have large commuter populations that have been working from home for almost a year now. 

So in December, the State of New Hampshire brought Zelinsky’s complaint directly to the U.S. Supreme Court as a boundary dispute between New York and New Hampshire.

“New Hampshire has no choice but to seek relief in our Nation’s highest court,” said New Hampshire’s governor, Chris Sununu, the day the case was filed. “Massachusetts cannot balance its budget on the backs of our citizens and punish our workers for working from home to keep themselves, their families, and those around them safe. We are going to fight this unconstitutional attempt to tax our citizens every step of the way, and we are going to win.”

Shortly after the case was filed, 14 other states including Connecticut filed in support of New Hampshire. New York has filed in support of Massachusetts. 

A matter of standing

One significant hitch in the case for New Hampshire is that the state doesn’t collect an income tax.

“The case is a little bit shaky,” Pomp said. “This is a cat fight between Massachusetts and New Hampshire over how much money Massachusetts is going to get. New Hampshire can’t even say we are being hurt because we are giving a credit and losing income tax.” 

It’s rather individual residents who are being hurt, Pomp said. So, it’s possible that the court will throw out the case and tell New Hampshire residents to sue Massachusetts themselves.

“The problem with that is, what are the odds of getting a fair shake in the Massachusetts courts on the issue,” Pomp said.

If that happens, the decision could mirror the earlier ruling against Zelinsky in New York.

If Connecticut had filed the case – however – this loophole wouldn’t exist. 

“It would make a difference if Connecticut filed it, New York couldn’t make the argument Massachusetts is making because Connecticut really is losing income,” Zelinsky said. “Both Connecticut and I are losing. Connecticut is giving up revenue and I’m losing because I’m paying higher taxes.”

Although revenues for New Hampshire will not be directly affected by the outcome of the case, Connecticut stands to gain between $400 and $500 million according to the Connecticut Business and Industry Association. At the same time, New York could lose up to $7.4 billion, according to the Empire Center. 

Waiting time

In mid-January, rather than deciding to take up the case, the Supreme Court first asked the acting Solicitor General to provide a brief on behalf of the federal government. In other words, the court is waiting to know what the new President — or at least his administration — thinks about the case.