State ranks poorly on remote taxes

North Carolinians are by now accustomed to seeing our state score well on national rankings of economic performance, cost of living, quality of life, and other measures. But a new study from the foundation arm of the National Taxpayers Union ranks North Carolina a dismal 42nd.

No, there was no overnight tax increase while you were sleeping. The study in question examines how state tax codes treat traveling professionals and remote workers. Ours treats them poorly.

Unless you make speeches, play professional sports, or consult for a living, you may not be aware that state governments routinely tax non-residents for even small amounts of income earned within their jurisdictions. If you live in Raleigh but conduct a weeklong seminar in Charleston for some of your South Carolina clients, you are obligated to pay South Carolina taxes on your seminar income. Ditto if you live in Norfolk but do a short job in Elizabeth City. You’re supposed to pay North Carolina taxes on what you’re paid for that job.

The concern here isn’t so much about double taxation — the U.S. Supreme Court held years ago that multiple states aren’t supposed to tax the same stream of income — as it is about administrative complexity and simple fairness. If you only perform work in a state for a short time, you impose few burdens on that state’s infrastructure and other public services. And unless you command a very high wage, the amount of tax collected from you is too small to justify the paperwork burden on you and your employer.

Naturally, if you regularly commute across state lines for work, say from Rock Hill to your job in Charlotte, these arguments don’t really apply. It is reasonable to require you to pay taxes to North Carolina, and for your employer to withhold those taxes on your behalf. Your constant presence in the Tar Heel State means you regularly benefit from its public services. But it turns out that most states, including our own, do little to distinguish between these very different cases.

Maine is one exemption. Unless you work at least 12 days there, earning at least $3,000, you aren’t required to pay income taxes in Maine. Our neighboring state of Georgia is another. It uses a wage threshold of $5,000 or 5% of your total income, whichever is lower. Other states with thresholds for triggering tax liability include Idaho, Iowa, Minnesota, Missouri, Oklahoma, Oregon, Vermont, West Virginia, and Wisconsin.

Another way to reduce the administrative burden on employers and employees is for states to negotiate tax-reciprocity agreements in which each agrees to tax only the incomes of residents. West Virginia, for example, already has such agreements with Kentucky, Ohio, Pennsylvania, Maryland, and Virginia. Few West Virginians have to bother with filing tax forms in multiple states.

North Carolina offers no such relief. That’s why we rank so poorly on the National Taxpayer Union’s Remote Obligations and Mobility (ROAM) Index. All other things being equal, we make it unnecessarily cumbersome for companies to do business here if they hire out-of-state workers for short periods. Among the states that levy income taxes, West Virginia has the highest ROAM score.

The tax treatment of cross-border income was always a thorny issue. The post-COVID explosion in telecommuting has dramatically increased its salience, however. Millions more Americans now work from home much or all the time, sometimes deriving income from multiple employers or jurisdictions.

“States cannot keep their heads in the sand and pretend that the economy is not changing,” says Andrew Wilford, who developed the ROAM Index. “Rules that once affected small subsets of mobile workers are increasingly becoming relevant to broader swaths of workers across many industries.”

Wilford recommends that North Carolina establish a fixed threshold for filing and withholding — 30 days is his “gold standard” — and that we negotiate reciprocal agreements with neighboring states. These steps would elevate us to the top tier of states on the index. That’s where North Carolina belongs.

John Hood is a John Locke Foundation board member. His latest books, Mountain Folk and Forest Folk, combine epic fantasy with early American history.