Last year, when the pandemic struck, whole industries went remote overnight. TV hosts set up mini-studios in their spare rooms, lawyers and judges conducted hearings over Zoom (sometimes with amusing consequences), accountants did their audits remotely, and on and on. Yelp had to scramble to find thousands of laptops overnight to give to their office staff. “We always had spare laptops, but not 3,000,” executive Carolyn Patterson told CNN.
Many workers moved to another state entirely. NPR collected stories of numerous people who have moved across the country permanently to take advantage of remote work — and some of them took a big risk by not getting permission from their employers first. Overall, a study published last summer surveyed U.S. companies and found 45 percent of them had moved at least part of their staff to remote work.
It turns out that it is structurally possible for many jobs to be done at home. Yet, for a variety of reasons, many companies are reluctant to cede this level of flexibility to their workers permanently. One big problem is America’s inconsistent and convoluted tax regime that complicates working across state lines. For both companies and employees to be able to make a fair choice about whether to continue working remotely will take action from Congress.
With any luck, the pandemic will be over soon, and people all over the country will face the question of continuing remote work. The potential savings for businesses paying for office space is considerable — particularly in high-cost cities like San Francisco and New York. For workers, there could be a big savings in time and money from not needing to commute.
But there are drawbacks too. Critics argue it has been possible to work remotely for decades — telephones and fax machines can do the job alright — and only a tiny fraction of workers have ever done it. It appears that offices have substantial productivity benefits that come from in-person collaboration. Humans, after all, evolved to communicate face-to-face where body language can carry subtle meaning, not through Slack and video calls. At least one study has also found that workers’ cost-savings is often eaten up by more working hours and increased spending on housing. A fair employer that closed a central office would allocate some of the savings into an office allowance for workers — something that is probably unlikely for non-unionized firms (which is most of them).
Yet surely there should be some space for remote work. I, for one, have worked remotely for the past seven years, and while it took some adaptation, I’ve grown to like it a lot. In particular, there are many American cities badly in need of population and spending where housing is dramatically cheaper than hot coastal cities. Working a San Jose tech job from, say, Nashville can mean a gigantic increase in take-home pay. (Some time ago I moved to Philadelphia from Washington, D.C., precisely to save on housing costs.)
That leads me to the policy problems.
The basic fact standing in the way of a remote work boom is the federal structure of the United States. Each state has its own unemployment system, its own tax laws, its own labor regulations, its own legal requirements for businesses, and so on. Having an employee move to another state can thus trip a whole slew of regulatory and tax requirements that businesses might not even know about — particularly if the state is far away.
That means two potentially costly things: taxes and legal compliance. As tax attorney Larry Brant writes, when a company has an employee in another state, that usually creates “nexus,” which means it is subject to that state’s taxing authority. “Corporate income should be allocated by state,” Brant told The Week, so a single fully-remote worker should not create tons of sales tax liability. However, a company will still be legally required to file a state tax return in every state where they have employees, as well as fulfill other requirements, like filing to do business in the state, paying into unemployment and worker’s compensation funds, and so on. Companies that don’t follow the rules — which they may not even know exist — can incur monetary penalties, says Brant.
These kinds of compliance costs probably represent the “biggest dollar cost” of remote work for employers, tax lawyer Robert Romashko told The Week. It’s isn’t that expensive to pay into unemployment and so forth, but it is expensive to hire legal professionals (and often more than one, as lawyers are generally not experts in every state) to figure out what all the rules are and file all the paperwork correctly.
Tax lawyers and accountants have been discussing these problems for a long time. Indeed, millions of people have been unknowingly running afoul of legal requirements for years already, because they are “not even aware of their tax liability,” says Romashko. In certain states, simply answering a work email while on vacation would technically count as work activity, and thus create some income in that state. (Of course it is very difficult for states to detect and enforce such things.)
Already many people who have been working from other states due to the pandemic have been forced to sort through conflicting state requirements about what they owe. As Bloomberg reports, in the worst cases employees may end up paying full income tax to multiple states, while others deal with a ton of obnoxious paperwork.
So what should be done? The cleanest solution would be to get rid of the states and simply have one regulatory and tax framework for the entire country, but obviously that is out of the question. However, the federal government can still govern cross-border remote work — after all, it is interstate commerce by definition. The full scope of a remote workers’ law would necessarily be extremely dense and complex, but the basic idea should be to make interstate remote work easily possible without incentivizing a race to the bottom. States should be able to tax workers and corporations in their states as they like, but companies should not be able to avoid taxes by shuffling around their employees.
The government could thus mandate standardized regulatory treatment for cross-border workers (perhaps by creating a high baseline to encourage better worker protections), create a single tax system for all remote work, and outline a uniform standard for what counts as being present in another state. A company with no footprint aside from remote workers might file an addendum to their federal tax return, and the IRS could sort out whatever might be owed to each state automatically. (A company that actually does business in multiple states, however, would still need to file multiple tax returns.)
Congress could also help by centralizing the unemployment system at the federal level. It is currently a state-federal partnership, and as we’ve seen during the pandemic, a great many states are horrible at administering the program. Many others have designed their systems to not work on purpose, so they can pay out the least possible amount of money. Worst of all, almost all states are not allowed to borrow money, but unemployment costs typically spike during an economic crisis — precisely when tax revenues decline. It would be simpler, fairer, and more efficient to run one big unemployment system at the federal level, where the government can best carry the burden.
There are already some partial efforts to address some of these problems. There are a bunch of interstate reciprocal tax agreements making it easier for remote workers to withhold taxes in the right place (naturally, with a whole slew of different forms for each one). And Congress has actually solved a very similar problem for transportation workers. By the logic detailed above, truck drivers and rail workers ought to be liable for state taxes in every single state they pass through doing their jobs — after all, such workers are earning money while they are present in all those locations. But forcing truck drivers to file 40 different tax returns would be absurd, and so in 1990 the Amtrak Act was passed mandating that they only have to file in their actual home state.
Ironing out annoying bureaucratic red tape to make working easy and simple is not historically the specialty of the American government. But logically socialists, liberals, and even some conservatives ought to be able to find common ground on this. Whatever one’s views on the level of taxation or regulation, surely people can agree that it should be simple to follow the rules.
President Biden, or someone in Congress, will just have to pay attention.