Credit: (AP Photo/Julio Cortez)

New Jersey tax law could soon be rewritten as a response to states like New York that maintain an aggressive approach to taxing out-of-state residents who work from home.  

Legislation approved by the state Assembly on Thursday seeks to level the playing field with states that assert they have the power to tax the income earned by remote workers if a company is based within their borders.  

But the New Jersey measure would also go a step further by establishing a new tax-credit program to entice out-of-state companies to create new locations in New Jersey, effectively repatriating their remote workers’ income taxes.   

The bill’s advancement comes after the COVID-19 pandemic has dramatically reshaped the workplace in many industries in ways that could have major implications for state budgets, including as permanent work-from-home or hybrid arrangements have become a regular option for many employees.  

The Assembly’s action also comes just weeks after New York’s plan to charge a new “congestion toll” on commuters who enter Manhattan below 60th Street — including those coming from New Jersey — cleared a key federal regulatory hurdle.   

Critical reviews 

Gov. Phil Murphy and other elected officials in New Jersey have been highly critical of the New York tolling plan, arguing it would be unfair to New Jersey motorists who are already charged a toll when crossing the Hudson River into New York via bridge or tunnel.  

The New Jersey Assembly previously voted 72-0 in support of a resolution that formally opposed New York’s tolling plan. 

New Jersey’s tax laws generally dictate that income is “sourced based on where the service or employment is performed.” To prevent double taxation, the New Jersey Department of Treasury has traditionally provided offsetting tax credits to residents for income taxes paid to New York and other states if their jobs are based there.  

In the case of remote work, officials in New York have consistently viewed the work performed by employees of New York-based companies who are working from home in New Jersey and other states — even during COVID-19 lockdowns and the new work arrangements that followed — as a “convenience,” thus permitting the workers’ income to still be subject to New York’s tax laws. 

The legislation would also set aside $25M for tax credits to out-of-state companies with 25 or more full-time employees that set up locations in New Jersey for the purpose of assigning New Jersey-based remote workers to them. 

During the pandemic, New Jersey officials estimated more than $1 billion in tax credits would be paid out under current tax policies to homebound commuters to offset income taxes that New York collected from New Jersey residents working from home. No such tax conflict exists between New Jersey and Pennsylvania due to a long-standing reciprocal compact that allows residents to pay income taxes where they live, regardless of where they work.  

The details 

In a bid to address the policy imbalance with states like New York, New Jersey would establish its own “convenience of the employer” rule under the legislation that cleared the Assembly in a 73-0 vote on Thursday.  

New Jersey’s policy change would only apply to the income earned by people who work for companies based in New Jersey but reside in states like New York that have already established their own such tax law, according to the bill.  

The legislation would also set aside $25 million for tax credits that would be offered to out-of-state companies with 25 or more full-time employees that set up locations in New Jersey for the purpose of assigning New Jersey-based remote workers to them.  

Yet another provision of the legislation calls for offering New Jersey residents state income-tax credits if they take it upon themselves to mount a successful legal challenge of the taxing of their income by other states when the income is earned while they are located physically in New Jersey. Tax credits would also be provided to residents who seek and accept from their employers a reassignment from an out-of-state location to an in-state location, according to the bill. 

In 2021, New Jersey was among several states that filed a legal brief in support of New Hampshire’s claim that Massachusetts had no right to collect income taxes from out-of-state residents working from home for companies based in Massachusetts.  

But the U.S. Supreme Court declined to take up the case, thus snuffing out New Jersey’s attempt to score a legal remedy to the bistate tax issue. 

A version of the remote-work taxation bill has already been cleared by a key legislative committee in the Senate, but it has yet to be put before the full Senate for the final vote needed to send the measure to Murphy for final consideration.  

It’s unclear when the Senate will act, but Richard McGrath, a spokesman for the Senate Majority, said on Thursday the legislation “continues to be a priority” for its prime sponsor, Sen. Joseph Lagana (D-Bergen).