By Jimmy Vielkind and Paul Berger
Tax revenues for New York City and the state are on the line as
some of the region's wealthiest residents flee to the suburbs or
beyond while employers keep out-of-state commuters in their
homes.
Both the state and city rely disproportionately on the
wealthiest taxpayers to fund social services such as schools,
hospitals and police officers. Before the coronavirus pandemic hit,
people who typically commuted into New York City but live in New
Jersey or Connecticut paid New York taxes for income earned in the
state.
That allocation could change depending on how the states
interpret rules on telecommuting, tax professionals say.
Meanwhile, other taxpayers who own both a New York City
residence and a second home outside the city might try to shift
their legal domicile to the latter, in hopes of escaping the city's
higher combined tax rates.
The stakes are high for such taxpayers because residents of New
York pay state, and city, income taxes on their investment earnings
and dividends, which could be much higher than their
compensation.
New York's revenues are already $13.3 billion, or about 14%,
below projections. The state is delaying payments and could cut
outlays to school districts and municipalities if a federal aid
package isn't approved.
"We have to pay attention to that because we do have a very
progressive tax code," State Budget Director Robert Mujica said,
which means wealthier people pay higher rates and bring in more
revenue.
Lawyers and accountants say New York auditors are aggressive in
determining a taxpayer's domicile, which is defined as a true home
to which they always intend to return.
"There is no one bulletproof thing you can do to suddenly change
your domicile. Auditors look at multiple aspects of your life, and
it's a judgment call," said Joseph Endres, a partner at the Hodgson
Russ law firm who specializes in tax work.
One 49-year-old tech entrepreneur told The Wall Street Journal
he and his family have moved permanently to their second home in
the Hudson Valley from Manhattan. The restaurants, office meetings,
opera and theater performances that previously bound him and his
family to the city have disappeared, he said, and probably won't
return anytime soon.
For tax purposes, he says, he and his peers are aware that if
their children still attend school in the city, it is hard to argue
the family has left. The man is considering pulling his children
from the city's elite private schools and is looking at public and
private schools in the suburbs. He estimates that if he can
persuade the city he is no longer a resident he will save more than
$100,000 a year in city taxes alone.
Schools in the Hamptons, a Long Island refuge popular with
wealthy families, say they have seen a surge in inquiries from
families leaving the city.
A spokeswoman for New York City said officials are concerned
about the potential impact of residence changes.
In 2016, income taxes accounted for about one-fifth of the
city's tax revenue. That year, about 25,000 people with incomes of
more than $1 million accounted for less than 1% of the city's tax
filers but accounted for almost 40% of income-tax collections,
according to the city's Independent Budget Office. Just 1,400
filers with incomes of $10 million or more accounted for 17% of
revenues.
Half of New York state's income-tax revenue comes from the
highest-earning 2% of taxpayers -- an estimated 188,000 people --
and Mr. Mujica said the state closely monitors migration.
"We also heard many of the same stories after 9/11, that people
moved out of the city temporarily to other places and didn't want
to come back to New York because of the fear that was there," Mr.
Mujica said. "The reality is that over time, New York has come back
and it's come back stronger than it was before."
A more immediate issue for the state involves telecommuting.
Roughly 1.3 million taxpayers with domiciles in other states
generated $7.9 billion in tax liability in New York in 2017, a
spokesman for the New York State Department of Taxation and Finance
said.
Work for a New York-based company performed remotely is still
taxable in New York if the telecommuting took place for the
convenience of the employee. Mr. Endres said he believed taxpayers
could make a strong case that working remotely because an office
was ordered closed as a result of the coronavirus meant they were
teleworking out of necessity, and not subject to New York
taxes.
One 40-year-old investment banker who lives in Connecticut but
works in Manhattan, and now is telecommuting, said he was worried
about receiving a Connecticut tax bill while his firm withholds tax
money for New York.
E.J. McMahon, research director of the Empire Center for Public
Policy, a fiscally conservative think tank, said Connecticut
residents filed 83,534 New York returns in 2017 with an average New
York-source income of $222,898.
New Jersey residents filed 421,427 New York state tax returns in
2017, reporting average New York-source income of $140,054, Mr.
McMahon said. He estimated two-thirds were daily commuters, based
on census data.
Mr. Mujica declined to estimate the potential impact, which
won't become clear until next year, when people start filing 2020
income-tax returns. A New York tax department official said there
was no change to the way the agency interprets the
convenience-of-the-employee rule for telecommuting. They declined
to comment on how it would be interpreted in the future.
On its website, New Jersey's Department of Taxation said that
during the pandemic, "wage income will continue to be sourced as
determined by the employer in accordance with the employer's
jurisdiction."
A spokesman for the Connecticut Department of Revenue Services
said it was developing guidance on telecommuting rules "that will
provide fair and equitable treatment of Connecticut-resident
individuals, as well as Connecticut-based businesses."
--Julia-Ambra Verlaine contributed to this article.
Write to Jimmy Vielkind at Jimmy.Vielkind@wsj.com and Paul
Berger at Paul.Berger@wsj.com
(END) Dow Jones Newswires
May 25, 2020 09:14 ET (13:14 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.