Many residents in New Jersey have been working from home for the majority of their time since the COVID-19 pandemic, but because their companies are based in New York, they are required to pay personal income tax to New York state, leading to tax revenue loss for New Jersey. In response to this, the New Jersey state government has provided tax offsets to encourage residents to appeal against the taxation by New York state; the Connecticut state government is also considering following suit.
This tax offset in New Jersey was proposed in July last year, where residents of New Jersey who appealed against the income tax paid to New York state for the period from 2020 to 2023, and successfully received refunds from New York state, can receive half of the refund amount as tax offsets in New Jersey. So far, one person in New Jersey has won a lawsuit in New York state and received a refund of $7,797.02. Connecticut Governor Ned Lamont has also introduced a similar tax offset bill as in New Jersey, but it requires approval from the state legislature, and it is unclear whether this bill can be passed before the end of the session on May 8.
According to data from the non-profit watchdog group Citizens Budget Commission, in 2021, out-of-state taxpayers paid nearly $8.8 billion in taxes to New York state, accounting for about 15% of the total income tax revenue of the state. Of this amount, $4.3 billion came from residents of New Jersey and $1.5 billion from residents of Connecticut. New Jersey officials estimate that if residents who work for New York companies but actually work from home shift their tax payments to their home state, New Jersey could increase its annual tax revenue by $1.2 billion. Connecticut officials also estimate that the state could increase its tax revenue by approximately $200 million as a result.
New York state requires out-of-state residents working for New York companies to pay New York state income tax, even if they spend most of their time working from home each week and not going to the office; unless they can prove that they can only work from home and cannot complete their work in the office, they must pay New York state income tax. This is why New Jersey started providing tax offsets to residents in the state last July, and so far, only one resident has successfully appealed in New York state and received a refund.
Despite New Jersey and Connecticut also implementing “retaliatory” tax provisions, meaning New York state residents who work for New Jersey or Connecticut companies but actually work from home must pay income tax to New Jersey or Connecticut, the additional tax revenue these states receive is difficult to compare with that of New York state.
New Jersey’s long-term goal is to completely overturn the taxation rules of New York state towards out-of-state residents, but this would require filing a lawsuit in federal court, with the case potentially reaching the US Supreme Court and winning, which currently seems like an almost impossible task. Previously, New Hampshire attempted to sue Massachusetts, requesting the state to suspend income tax collection from approximately 80,000 New Hampshire residents working from home during the pandemic, but the US Supreme Court did not take up the case.