State Income Tax Simplification Act

The U.S. Senate to Considers Law to Normalize State Income Tax Rules.

This weekend I ran across some interesting legislation the U.S. Senate is taking a look at: the “Mobile Workforce State Income Tax Simplification Act.” We’ll call it MWSITSA just to make it more confusing. Although the wordy name suggest otherwise, the law’s aim is to simplify paying multiple state income taxes. This new rule could make life easier for people who don’t spend all 365 days in Florida (or any state!).

What’s the Problem?

Comparing state income tax schemes
This seems like a decent analogy

It comes as no surprise to those paying taxes in multiple states, but there’s a serious problem with the current state income tax system. Each state has their own particular rules when deciding whether you owe it income taxes and how much. Some states require a payment if you worked there for even a single day! The more generous states at least require a multiple week stay before you trigger a demand to contribute to their treasury.

This doesn’t factor in the problem of calculating how much you owe. Some states fairly look at the time you’ve been there when creating a number. Others have a floor for their tax ransom (a few hundred dollars to over a thousand) that doesn’t take into account the actual time you’ve spent in the state.

This isn’t just a problem for employees who cross state lines. It can be a administrative nightmare for employers. Business owners must account for their employees’ activities when withholding money on paychecks. Imagine the fun when they have to figure this out for a myriad of states. The self-employed in this situation also just better have a qualified CPA on speed dial.

The Guts of a Solution

The MWSITSA seeks to bring order to the chaotic state income tax landscape. But it’s a modest solution.

Federal law would normalize the time trigger for payment to state income tax at 30 days. At that time, the state’s normal rules for how much to pay kicks in. This does away with “gotcha” state rules. Those states that demand a tax payment for even 1 day of work in their state. It, however, doesn’t fix the problem of tax floors. That working in state, regardless of how much time is spent there, requires some minimum payment. The law also doesn’t touch the variations in complex state tax schemes. Namely, the hoops one must jump through when coming to a tax figure.

The law does let people deduct income subject to tax in other states, from income subject to tax in their home state (not much help to those who have Florida as their home state). This sounds like a great idea, but it’s already how the tax system works.

Florida is my Home State!

MWSITSA would be a nice financial and resource boon for workers and businesses who call Florida their home state. No state income tax unless you’re in another state for 30 days!

The time spent in complying with various state income tax rules is not a light burden. Hours can be spent on figuring out the taxes due in just one state. Multiply that by the 41 states that have different tax schemes and multiple workers, and the problem is apparent. Is the drain on business resources really worth the revenue states generate? At what point does the cost of the implementing various state income taxes outweigh the benefit? It’s likely that many workers and businesses simply ignore paying state income tax, whether through ignorance or avoidance.

It seems to this writer that MWSITSA is a good start to remedying these issues. To fully address the problem, however, the formula for calculating state income tax must be uniform throughout the nation in all aspects. If you pay $1,000 in one state for their income tax for a certain number of days worked, you should pay that same amount in the neighboring state, all things being equal.

For a more detailed look at these issues, the Council on State Income Taxation has an informative website here.

Ari Good, JD LLM, a tax, aviation and entertainment lawyer, is the shareholder of Good Attorneys at Law, P.A. He graduated from the DePaul University College of Law in 1997 and obtained his L.L.M. in Taxation from the University of Florida.

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