Help the Middle Class by Easing the Mobile Workforce’s Tax Rules

The Multistate Tax Commission’s proposed rule to simplify tax administration for an increasingly mobile workforce would ease compliance burdens for many. But while it would improve the existing system by creating some semblance of a safe harbor for income earned in nonresident states, it doesn’t go far enough.

To be truly effective, the MTC model needs three modifications: an expansion of the default safe harbor threshold to 30 days, an income-based sliding scale, and an end to exclusions for high-income taxpayers.

Forty-one states impose income tax on nonresidents. Many, including Arkansas, Delaware, and Nebraska, trigger tax obligations after a single day of work. This creates burdens for mobile workers and businesses.

For example, a consultant based in Illinois who takes a three-week work trip to New York, a few client meetings in North Carolina, and makes a quick stop in Ohio for a conference before returning home could owe income taxes in four states. That means he would be forced to file at least four separate tax returns and navigate a maze of withholding rules.

The MTC wants to create one clear standard for when a state can levy a tax on nonresidents. Those who work in a state for 20 days or fewer wouldn’t owe state income tax, and employers wouldn’t be required to withhold state taxes for these short-term forays. This would eliminate the administratively onerous requirement of mobile workers needing to file multiple state tax returns for brief work trips.

If state uniformity is the goal, we should chase it where we can already find it. Expanding the safe harbor threshold would align the proposal with employer- and advocacy group-supported standards, as well as with existing state policies in Illinois, Indiana, Montana, and West Virginia. Both the Council on State Taxation and federal proposals have endorsed this threshold as the most practical standard.

The model rule also should introduce an income-based sliding scale. The MTC’s one-size-fits-all approach treats a sales rep making $50,000 per year the same as a $5 million hedge fund manager. Relief should target those who need it most to reduce compliance burdens: low- and middle-income employees.

A graduated scale based on income would be fairer and more practical. While a 30-day threshold may work well for middle-income brackets, there should be adjustments on either side to account for low- and high-income earners.

For instance, those making under $100,000 could be subject to a 40-day threshold, while those making more than $250,000 could be subject to a lower 20-day threshold. This would prevent excessive compliance costs for middle-class workers and ensure that high-income, highly mobile workers—who may structure their work to minimize state tax exposure—still pay their fair share.

The income thresholds also should be pegged to inflation to ensure that as wages rise over time, the tax rules don’t disproportionately burden middle-class employees.

Under the MTC’s proposal, the safe harbor rule doesn’t apply to professional athletes, entertainers, or “persons of prominence”—those who perform services on a per-event basis. Highly paid mobile workers would get tax relief, but a baseball player or touring musician wouldn’t.

The distinction on the way money is earned, rather than how much is earned, seems arbitrary. Athletes and entertainers do tend to be high-income and highly mobile earners, and states don’t want to lose out on their tax revenue simply because they only play a few in-state games or concerts per year.

But a Fortune 500 executive who travels for board meetings may be just as mobile, and just as highly compensated, as a baseball player. So why should only one of them be taxed from day one? A high-end consultant earning $900,000 per year would get the default grace period, while a touring cellist making a fraction of that wouldn’t.

From a pure drafting clarity standpoint, there is no clear standard for what constitutes a person of prominence—leaving the door open for state-by-state subjective and inconsistent application. The MTC could help simplify compliance by ensuring the rule doesn’t contain capricious exceptions itself.

With states such as Arkansas and Minnesota debating mobile workforce tax reforms, now is the time to get this right. Congress has failed for nearly two decades to pass a federal fix.

Expanding the threshold to meet state and federal expectations and swapping unfair carve-outs for an income-based sliding scale would make the rule more practical, equitable, and more likely to be adopted by states.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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