Montana Revenue Official Floats Compromise on Mobile Workforce Bill

June 23, 2010

Joseph Bishop-Henchman

Joseph Bishop-Henchman

Congress is considering H.R. 2110, a bill that would prohibit states from imposing income taxes on traveling workers unless they spend at least 30 days in the state. Currently, most states require tax payments and even tax withholding for workers in the state for much shorter periods of time, including as little as a day.

Such practices disrupt interstate commerce and falsely suggest that business travelers earn their income in traveling states and not from the home office. In recent hearings, Congress has shown its outrage at these state practices, and states, represented by the Multistate Tax Commission (MTC) are talking with bill supporters in search for a compromise.

State Tax Notes‘s Nicola White reports (subscrip. req’d) that Montana Revenue Director Dan Bucks has floated a compromise:

Bucks suggested that…the individual income tax and withholding tax issues [be treated] separately. Bucks’s wage withholding proposal is similar to the proposal in the current MTC draft, with a uniform 20 working days threshold. But it differs on the individual income tax side.

To simplify individual income taxation, Bucks suggested that the MTC or the Federation of Tax Administrators set up a centralized website with a calculator where taxpayers who work in more than one state could “quickly and easily” type in the number of days they spent working in a state and what they earned. The calculator would then tell the taxpayer whether they had to file a return in that state.

Such a calculator should exist anyways, and that it doesn’t is telling. Here’s a similar project: the compendium of state sales taxes from the Streamlined Sales Tax Project. Of the 23 SSTP member states listed, the web calculator for ten of them is “N/A”. The overall table includes this all-encompassing disclaimer: “This table only reflects the general state sales tax rate. Some states have reduced rates on food or drugs. Please view their web sites to obtain the correct state rate for these products and other pertinent laws.” Not very helpful.

Put simply, the problem isn’t insufficient technological sophistication. It’s aggressive state practices, resulting in state laws that are intentionally complex and designed to raid revenue from business travelers. This is nothing new: we have a U.S. Constitution with federal power over interstate commerce precisely to curtail such state practices.

A website calculator is nice, but it doesn’t fix the real issues.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Withholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests.

A sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.