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By Edward Zelinsky

Lucio Noto worked for Mobil and ExxonMobil in Virginia and Texas before retiring in 2001. In his retirement, Mr. Noto and his wife Joan maintain homes in Greenwich, Connecticut and in East Hampton, New York. For state income tax purposes, the Notos are residents of both Connecticut where they are domiciled and New York where they spend at least 183 days annually at their second home.

During his employment in the oil industry, Mr. Noto earned stock options and deferred compensation. In 2005 and 2006, he exercised these stock options at considerable gain and also received the deferred compensation he had earned earlier during his employment. Both New York and Connecticut taxed the resulting income in full without providing a credit for the income tax levied by the other. Consequently, the Notos, as dual residents of both the Empire State and the Nutmeg State, paid double state income taxes on their stock option and deferred compensation income.

The New York Supreme Court (the Empire State’s trial court) recently upheld this double state income taxation by holding that New York could tax the Notos’ income in full, even though Connecticut taxed that income as well. The Noto court correctly applied the tax and constitutional law as it today governs dual state residents like the Notos. While double taxation of dual state residents is currently legal, such double taxation is neither fair nor economically efficient.

Tax by Phillip Ingham. CC BY-ND 2.0 via Flickr.

In a recent article in the Florida Tax Review, I argue that, as a matter of both tax policy and constitutional law, it is time to apportion state personal income taxes to eliminate the double state income taxation of dual residents like the Notos. As to income which two or more states tax only on the basis of residence, such states should apportion, based on the dual resident’s relative presence in each state of residence. This apportioned approach would eliminate the double taxation of dual residents’ incomes and would comport better with modern patterns of residence and mobility.

The Noto decision illustrates the need to eliminate the double state income taxation of dual residents. In a case like the Notos’, New York and Connecticut should each tax only a pro rata share of the Notos’ option-derived and deferred compensation income based on the days the Notos spend in each of these two states of residence.

On days when a dual resident lives in his second state of residence, the first state provides no services which justify taxing the part of the individual’s income properly apportioned to the time in his second state of residence, the state which provides services on those days. Part-year benefits do not justify full-year taxation. The status quo is economically inefficient as the specter of double residence-based taxation causes unproductive tax-motivated behavior to avoid such taxation. Such economically unproductive behavior inhibits individuals from moving across state lines as they would without interference by tax considerations.

So far, the US Supreme Court has been unwilling to declare unconstitutional the kind of double state taxation imposed upon dual state residents like Mr. and Mrs. Noto. Moreover, most states have been unwilling to abate such double taxation by extending a credit for the tax imposed by the taxpayer’s second state of residence. The result is the kind of double taxation imposed on the Notos by New York and Connecticut.

It is easy to dismiss this type of double state income taxation as a quandary of the proverbial one percent. However, the problem of double residence-based personal income taxation, once limited to the very rich, is moving down the income scale as more individuals maintain second residences in different states, e.g., the Baby Boomer retiree who establishes a winter home in a warm climate; the dual career couple that balances the demands of work and family by maintaining two homes in different states.

In this environment, the traditional acquiescence to double state income taxation of dual residents is no longer acceptable. Congress could eliminate this double taxation through a federal law requiring states to apportion income when taxpayers are residents of two or more states. The US Supreme Court could reach the same result by requiring under the Constitution’s Commerce and Due Process Clauses that states apportion the income of dual residents. The states could, on their own, move toward such apportionment, either by unilateral adoption of rules of apportionment (including tax credits) or by mutual agreement.

The kind of double state income taxation imposed upon dual state residents like the Notos is an anomaly in the 21^st century. In the interests of fairness and economic efficiency, this anomaly should be eliminated by requiring states to apportion the income of dual residents.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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Today is 15 April or Tax Day in the United States. In recognition of this day we compiled a free virtual issue on taxation bringing together content from books, online products, and journals. The material covers a wide range of specific tax-related topics including income tax, austerity, tax structure, tax reform, and more. The collection is not US-centered, but includes information on economies across the globe. Be sure to take a moment to view this useful online resource today.

Oxford University Press has compiled a new virtual issue on taxation that brings together content from books, online products, and journals. Start browsing this timely and useful resource today!

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By Edward Zelinsky

Telecommuting benefits employers, employees, and society at large. Telecommuting expands work opportunities for the disabled, for those who live far from major metropolitan areas, and for the parents of young children who value the ability to work at home. Telecommuting also removes cars from our crowded highways and enables employers to hire from a wider and more diverse pool of potential employees.

It is thus anomalous that New York State’s personal income tax discourages interstate telecommuting by taxing the compensation non-resident telecommuters earn on the days such telecommuters work at their out-of-state homes. Under the misleading label “convenience of the employer,” New York subjects telecommuters to double income taxation by their state of residence as well as by New York – even though New York provides non-resident telecommuters with no public services on the days such interstate telecommuters work at their out-of-state homes outside of New York’s borders.

Some of New York’s elected officials profess interest in making New York tax policy more rational and family-friendly. These officials, however, have shown no willingness to repeal the “convenience of the employer” rule to stop New York’s double state income taxation. Taxing non-resident, non-voters for public services they do not use is just too politically tempting for Albany to resist.

Fortunately, federal officials have begun to recognize the unfairness and irrationality of the double state income taxation inflicted on non-residents by New York’s “convenience of the employer” rule. Most recently, US Representative Jim Himes, joined by his House colleagues Elizabeth Esty and Rosa DeLauro, introduced H.R. 4085, The Multi-State Worker Tax Fairness Act of 2014.

Representative Himes, and his colleagues, are to be commended for introducing this much needed legislation. If enacted into law, H.R. 4085 would make the tax system safe for interstate telecommuting.

In previous incarnations, legislation along these lines was denominated as The Telecommuter Tax Fairness Act. The legislation’s goal remains the same. For Congress, using its authority under the commerce clause of the US Constitution, to forbid New York and other states from double taxing no-nresidents’ incomes on the days such non-residents work at their out-of-state homes.

Consider in this context the spate of service stoppages experienced by MetroNorth railroad commuters this winter. During these stoppages, public officials quite sensibly urged MetroNorth commuters to work from home rather than clog the already crowded highways to reach Manhattan. However, no public official spoke candidly about the tax penalty such commuters triggered by working at their Connecticut homes.

New York’s double taxation of non-resident telecommuters is not limited to those who live and work at home in the northeast. Under the banner of employer convenience, New York projects its taxing authority throughout the nation. In widely reported cases, New York imposed its personal income tax on Thomas L. Huckaby for days he worked at his home in Tennessee, on Manohar Kakar for days he worked at his home in Arizona, and on R. Michael Holt for days he worked at his home in Florida.

Nor is the threat of double taxation limited to New York’s personal income taxes imposed on non-resident telecommuters. Fortunately, many states recognize that double taxing non-resident telecommuters is ultimately self-destructive, driving telecommuters and the firms which employ them to states with more welcoming tax policies. However, other states emulate the Empire State’s tax hostility to interstate telecommuting. For example, Delaware taxed Dorothy A. Flynn’s income for the days she worked at her Pennsylvania home, even though Ms. Flynn did not set foot in Delaware on these work-at-home days.

The unfairness and inefficiency of the double state income taxation of interstate telecommuters has led a broad national coalition to favor federal legislation like H.R. 4085. Among those supporting such legislation are the American Legion, the Christopher and Dana Reeve Foundation, the National Taxpayers Union, The Small Business & Entrepreneurship Council, the Association for Commuter Transportation, The Military Spouse JD Network, and the Telework Coalition.

Representative Himes, along with Representatives Esty and DeLauro, are to be commended for introducing H.R. 4085. If enacted into law, this much needed legislation would make the tax system safe for interstate telecommuting by forbidding double state income taxation of non-resident telecommuters.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears on the OUPblog.

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Image credit: Metro-North EMD FL9 leaving Stamford, CT. Public domain via Wikimedia Commons.

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By Edward Zelinsky

One widely-discussed possibility for reforming the federal income tax is limiting the deduction for charitable contributions. Whether or not Congress amends the Code to restrict the income tax deduction for charitable contributions, Congress should limit the charitable contribution deduction under the federal estate and gift taxes. Such a limit would balance the need for federal revenues with the desirability of encouraging charitable giving.

On December 11th, the advocacy group Responsible Wealth called for the federal government to tax estates over $4,000,000 at rates starting at 45%. Among those joining this call were heirs to old fortunes such as Abigail Disney and Richard Rockefeller and owners of new wealth such as Bill Gates, Sr. Most notably, Warren Buffett agreed (as he has in the past) with this recent plea for higher estate taxes.

I am a fan of my fellow Nebraskan and agree with him that the federal government should impose estate taxes, particularly on large fortunes. I also admire Mr. Buffett for the Giving Pledge which he has promoted with the younger Mr. Gates. Under that Pledge, wealthy individuals commit to giving at least half of their wealth to philanthropy.

There is, however, considerable tension between the Buffett commitment to federal estate taxation and the Buffett commitment to philanthropy. By virtue of the estate tax charitable deduction, when a wealthy decedent leaves part or all of his estate to charity, no estate tax is paid on these contributed amounts.

It is perfectly plausible to call for estate taxation only for those who don’t distribute their wealth to philanthropy. It is, however, hard to reconcile that position with Responsible Wealth’s advocacy of strong estate taxation. Mr. Gates, Sr., for example, declared that “it would be shameful to leave potential revenue on the table from those most able to pay.” However, that is precisely what happens when large estates go to charity, namely, estate tax revenue which would otherwise flow to the federal government is instead diverted to charity. Such charity may be worthwhile but it does nothing to reduce the federal deficit.

Similarly, Ms. Disney argued that “a weak estate tax” falls “on the backs of the middle class,” presumably because the federal government will respond to reduced estate tax revenues by deficit financing, by raising other taxes on the middle class or by reducing government spending. However, when an estate is distributed to charity free of estate taxation, the government confronts these same choices.

A compromise could preserve the incentive for charitable giving while also generating some estate tax revenues for the federal government: Limit the estate (and gift) tax charitable deduction.

Many, including President Obama, have suggested such limitations on the income tax charitable deduction. If, for example, an individual is in the 35% federal income tax bracket, the President has proposed that the donor receive a deduction as if he or she were in the 28% bracket. In a similar fashion, the estate tax charitable deduction could be curbed, thereby generating some additional revenues for the federal fisc while also keeping a tax-incentive for charitable giving.

Consider, for example, a billionaire who leaves his entire estate of $1,000,000,000 to charity. To simplify the math, let’s assume that this billionaire would pay estate tax at the 40% rate if he did not bequeath all his assets to philanthropy. Because this $1,000,000,000 bequest is fully deductible for federal estate tax purposes, no tax is paid in this example. If this billionaire had not made this charitable bequest but had instead left his money to his children, the federal government would have received estate tax revenues of $400,000,000.

Suppose now that Congress limits the federal estate tax deduction to 70% of the amount donated to charity. In this case, the billionaire would leave a taxable estate of $300,000,000. At a 40% rate, this would require a federal estate tax payment of $120,000,000.

To provide the cash to pay this tax, this billionaire would probably reduce his charitable bequest to retain cash to pay this estate tax. However, at the end of the day, charity would receive the bulk of this billionaire’s assets while the federal government would receive some estate tax.

A limit on the estate tax charitable deduction could be constructed to fall only on relatively larger estates. For example, the first $10 million of charitable bequests could be fully deductible for estate tax purposes and only the amount gifted over that threshold would be deductible in part.

Alternatively, the limit could be phased in as charitable contributions increase. For example, the first $10 million of charitable bequests could be fully deductible for estate tax purposes. Then the next $50 million of philanthropic gifts could be 90% deductible and any further gifts would be 70% deductible for federal estate tax purposes.

The details are less important than the basic policy: By limiting the estate tax charitable deduction, all large estates donated to philanthropy would pay some federal estate tax revenues at a reduced rate. This would balance the need for federal revenues with the encouragement of the kind of charitable bequests quite commendably encouraged by Mr. Buffett and the Giving Pledge.

Edward A. Zelinsky is the Morris and Annie Trachman Professor of Law at the Benjamin N. Cardozo School of Law of Yeshiva University. He is the author of The Origins of the Ownership Society: How The Defined Contribution Paradigm Changed America. His monthly column appears here.

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by Teri Terry "But in this world nothing can be said to be certain, except death and taxes." Benjamin Franklin, 1789. In my closet. Quick - shut the door! Yesterday I went to one of the Society of Authors ‘Tax Talks for Authors’ run by Barry Kernon and Andrew Subramaniam, senior accountants in HW Fisher & Company's Authors and Journalists Team. Yes, that’s right: they have an actual team for