Most taxpayers by now have filed their state income tax returns (or, if they haven’t, they should have). While that’s never a fun or convenient process, taxpayers with the misfortune of having income tax nexus in multiple states had it a bit harder than everyone else. Those taxpayers were required to file an income tax return not just for their state of residence, but in other states as well. This entailed a complicated process of paying income taxes to other states, then claiming those taxes paid as a credit against their home state’s tax assessment.
That process is time consuming, but it also is disadvantageous to the taxpayer. The way the credit for taxes paid to other states works ensures that taxpayers effectively pay whichever state’s tax rate is higher, a “heads, I win. Tails, you lose” scenario.
In the past, states had looked to solve this problem with a simple, yet elegant solution. Rather than subjecting taxpayers to this system of paying taxes to multiple states, some states entered into “reciprocity agreements,” bilateral agreements under which two states agreed that taxpayers originally required to pay taxes to both states need only pay taxes to their state of residence.
These agreements took all the guesswork out of state tax filing, as well as just making sense. Even a taxpayer commuting into another state for work primarily benefits from the services their home state provides, including police, infrastructure, education, local government aid and so on. It’s only logical that Americans’ taxes should primarily contribute towards the state services they benefit from.
While momentum on new agreements has stalled, fifteen states have reciprocity agreements with at least one other state. Still, the majority of taxpayers are not covered by these agreements, as just 30 percent of commuters into states with an individual income tax are protected from income tax obligations in that state by a reciprocity agreement.
Of the remaining 70 percent of taxpayers, many have the misfortune of commuting into states that have reputations for aggressively pursuing the taxes of anyone they can get their hands on, such as New York. But many others are commuting to and from states that have already entered into reciprocity agreements with other states.
The starkest example of this involves commuters between Wisconsin and Minnesota. Both states theoretically offer income tax reciprocity to any state willing to offer their residents the same tax treatment. Unfortunately, a past agreement between the two states fell apart over disagreements over a revenue-sharing arrangement.
Fortunately, there appears to finally be interest in creating the first new reciprocity agreement in decades. Wisconsin legislators recently passed S.B. 374, legislation that would commission a study on the impact of re-instituting reciprocity between Wisconsin and Minnesota. While not a reciprocity agreement in itself, it represents a necessary first step towards one and signals Wisconsin’s interest.
While Wisconsinites and Minnesotans can perhaps look forward to simpler state tax returns in the future, other taxpayers should hope that this gets the ball rolling in other states. Reciprocity agreements are a commonsense solution to an increasingly complex tax landscape, as the rise of remote work and increasingly mobile jobs threaten to multiply the number of state tax returns a taxpayer must file.
Improvements in technology should make peoples’ lives easier. Unfortunately, shortsighted states are increasingly using the changes the internet has wrought on Americans’ lives as an excuse to expand their tax nets ever wider. Reciprocity agreements are a good way to reverse that trend in taxpayers’ favor for once.
Andrew Wilford is the Director of the Interstate Commerce Initiative with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.
The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller.
