by Sarah Curry
Director of Fiscal Policy Studies
Ice storms and hurricanes have two things in common – power outages. Many times throughout the year North Carolina is faced with severe weather that has the potential to cause massive power outages across the state. When over 400,000 people in the Greensboro area were without power a few weeks ago, Duke Energy brought in additional workers from the Midwest and Florida to help restore power. There is a voluntary program that exists for utility companies to share personnel and resources between states when there is an emergency, but there is one caveat – taxes. North Carolina requires that nonresident employees be subject to tax withholding on their first day of travel to the Tar Heel State.
North Carolina is not the only state with this stipulation; Pennsylvania creates this same tax situation for nonresident workers during times of emergency. A former Pennsylvania Public Utility Commission member in an opinion piece found in the Pittsburgh Post-Gazette wrote earlier this month:
Unfortunately, there is a problem in Pennsylvania that recalls the old saying that no good deed ever goes unpunished: Our state requires out-of-state emergency responders and others who work here for a short period — even a single day — to file state income tax returns if they earn as little as $33. Only residents of Indiana, Maryland, New Jersey, Ohio, Virginia and West Virginia are the exception.
Put this issue on a personal level: Imagine an emergency responder who has a choice of being sent to Pennsylvania where this tax burden would be imposed upon her or another state where out-of-state emergency responders are exempt from state and local income taxes. At a time when state officials should be extending a hardy "thank you," Pennsylvania state officials are yelling, "pay me!"
The situation mentioned above occurs in the case of utility workers after a natural disaster, but that is not the intended purpose of these states’ tax laws. This tax has been around for quite a while but is more commonly known or referred to as the ‘jock tax.’ It gained noteriety in 1991 when California decided to tax Michael Jordan and his Chicago Bulls teammates after they beat the Los Angeles Lakers for the NBA championship. The tax got a lot of attention, and more and more states started enacting it because they could collect tax revenue from high-paid athletes and entertainers who play and perform at venues nationwide.
The problem with what seemed an easy stream of revenue for states was that the tax was made to target a single profession, and forces people to pay taxes where they have no representation. Supporters of this tax do not realize that it trickles down to people who aren’t making multimillion-dollar salaries, and it applies to all traveling workers. See the map below for a breakdown of how each state treats traveling workers’ income. North Carolina is in red, meaning a worker is required to pay income tax starting on the first day of his job. Neighboring states are in yellow and green, meaning that either workers are subject to taxes after meeting a threshold, or no income tax is collected at all, respectively.
More than half of states require employers to withhold tax from a nonresident employee’s wages beginning with the first day the employee travels to the state for business purposes, and another sixteen collect after a certain threshold is met. Only nine states do not impose a personal income tax on nonresidents working in the state.
This problem is not a new one and has even led to debate in Congress with a bill being introduced to address the issue almost every year since 2006. The most recent was legislation sponsored by U.S. Rep. Howard Coble (R-NC) and U.S. Sen. Sherrod Brown (D-Ohio) known as the Mobile Workforce State Income Tax Simplification Act. This bill states that an employee’s wages or other compensation should be subject to state income tax in either (1) the employee’s state of residence, or (2) a state where the employee is present and performing employment duties for more than 30 days during the calendar year. If the employee does not meet either of the two requirements, then a state would not be able to impose withholding and reporting requirements. This bill would not protect professional athletes, professional entertainers, or public figures that give speeches or make personal appearances. The bill passed the House but unfortunately did not get any attention in the Senate.
Howard Coble is not seeking re-election, but that doesn’t mean North Carolina can’t simplify its tax code. The massive tax reform package last year proves that legislators are committed to making changes; here is one change that needs to be made. Take the language from the federal bill, and redefine who is subject to the state’s income tax. There are going to be natural disasters in the future; why not make it as easy as possible to get workers here to help our citizens instead of taxing them, and maybe pushing them to more tax friendly states first?
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