W.Hat is a city official to do when a pandemic strikes tax revenue? In our home states of Michigan and Ohio, state and local leaders have a strange – and unconstitutional – answer. They want cities to tax people who neither live nor work within their borders.
The legislature is reacting to the work-from-home phenomenon caused by COVID-19. When the pandemic broke out, government officials issued shutdown orders for most companies. Millions of workers sat at the kitchen table or in their home office instead of at their desks in the big city. However, cities rely on these workers to balance their budgets. Employees may be taxed if they work within city limits, but if they work from home in the nearest city, their income is taboo – or at least it should be.
Take Grand Rapids in western Michigan. The city imposes a 0.75 percent tax on non-resident income, which typically accounts for about 45 percent of the city’s income tax revenue. However, according to the Grand Rapids Income Tax Administrator, about 80 percent of non-residents who filed taxes in 2020 have applied for a work-from-home refund. Now the city is planning about $ 20 million less income tax revenue in 2020.
In cities like Detroit, where the foreign tax is the highest in the state at 1.2 percent, the damage could be much greater. Despite ordering from home, some companies have continued to withhold taxes on workers that they shouldn’t be paying, possibly with approval from local officials. This is directly against Michigan’s tax law.
Two dozen communities – backed by the Michigan Municipal League – have asked Michigan lawmakers to continue reaping money from people outside their borders. But no Michigander would support a law that would allow Indiana or Illinois to tax people living in Michigan. Why would Detroit be able to dive into the paychecks of people who live and work in Flint? The answer is simple: it shouldn’t.
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Unfortunately, this unfair taxation is happening in Ohio right now. Last year, the General Assembly passed a comprehensive law to fight pandemics, classifying work done at home as work in the office, which is often located in cities with higher taxes. Since then, Ohio’s more than 600 local governments with income taxes have continued to take money from workers, many of whom haven’t set foot in town to work in months, if not more than a year.
According to a report from Ohio, non-residents pay nearly 70 percent of the state’s city income taxes. However, these workers have no option to change local tax laws because they do not live in the cities and therefore cannot choose where they will be taxed. It’s a modern version of taxation without representation.
The Buckeye Institute is currently representing workers in four lawsuits aimed at reversing Ohio’s emergency-based local income tax system. The cases indicate that the U.S. Constitution’s government clause allows governments to collect income tax only on their residents or on non-residents for work performed within the confines of local government. In addition, Ohio courts have ruled that a tax must have some “tax relative” to the supply or service provided by the local government. Over the past year, employees working from home have not used city services, breaking that tax relationship.
Our states are not the only ones fighting with ham-fisted tax breaks against such tax breaks. New Hampshire has filed a lawsuit in the US Supreme Court against a law in Massachusetts that requires workers outside of the state to continue paying state income taxes when working from home. While the justification for these guidelines may disappear as the pandemic recedes, many companies are considering leaving their teams to work from home on a regular or even permanent basis. As a result, more states and cities are likely to attempt to tax non-residents in the coming months.
State and local governments need to find better ways to fund urban services in a world where teleworking is becoming increasingly popular. In the short term, they can use the more than 130 billion US dollars in city and district funds that are offered in the latest federal economic law. Indeed, one of the main goals of the law was to help state and local governments with the fiscal challenges posed by the pandemic. In the long run, they could limit spending or cut taxes to better attract businesses and workers.
There are many good options. It does not include an unconstitutional tax on non-residents.
Patrick Wright is the vice president of legal affairs at the Mackinac Center for Public Policy in Michigan. Jay Carson is the senior litigator at the Buckeye Institute in Ohio.