By Andrew Wilford, National Taxpayers Union Foundation
In many states around the country, a taxpayer working just a single day in that state triggers not only an obligation to file an income tax return, but also an obligation on the part of that taxpayer’s employer to withhold income taxes on its employee’s behalf. For many taxpayers taking a single day’s working vacation in another state, that reality can come as a nasty surprise.
Fortunately, thanks to legislation that passed last month in Montana, the list of states asserting these counterintuitive obligations is one shorter. H.B. 447, signed by Governor Greg Gianforte on May 18, institutes thresholds clarifying that taxpayers who spend 30 days or fewer working in the state of Montana will face no Montana individual income tax filing or withholding obligations.
This meets the “gold standard” recommendations under NTUF’s Remote Obligations and Mobility (ROAM) Index, and consequently gives Montana a massive boost. Under the 2023 ROAM Index, Montana came in at a dismal 38th out of 50 states, offering no protections to remote and mobile workers except for a single reciprocity agreement with North Dakota.
With the passage of H.B. 447, Montana’s rank on next year’s ROAM Index should be substantially higher. On paper, 30-day thresholds for filing and withholding should boost Montana all the way up to 11th place on the ROAM Index, the second-highest rank for a state with no individual income tax.
H.B. 447 does include some asterisks that make the legislation less helpful to mobile workers than it could be. The thresholds under H.B. 447 do not apply to construction workers and “key employees,” defined as employees with over $500,000 in compensation that year. These carveouts undermine the goal of mobile workforce thresholds: making tax obligations simpler and more logical for mobile workers.
On the other hand, Montana did avoid one of the major pitfalls that has hurt other states’ mobile workforce thresholds: reciprocity contingencies. States like North Dakota and Utah have made their thresholds contingent upon the taxpayer’s state of residency offering “substantially similar” thresholds in return (or have no individual income tax at all). While these contingencies are intended to promote greater uniformity, their practical impact is that they greatly reduce the number of taxpayers who can actually benefit from the safe harbor created by mobile workforce thresholds.
All in all, Montana should be applauded for recognizing that whatever meager revenues are foregone by the thresholds it is instituting (the bill’s fiscal note estimates a de minimis impact on revenues) are not enough to justify forcing taxpayers to file a Montana income tax return especially when they may reasonably be unaware that spending a short time working in the state creates income tax nexus at all.
Similar, though not identical, legislation to Montana’s was introduced this year in Kansas, Nebraska, and Minnesota. Hopefully more states will recognize and act on the need to create reasonable safe harbors that protect taxpayers from tax obligations that they may never even know they had.
Andrew Wilford is the Director of the Interstate Commerce Initiative and a Senior Policy Analyst at the National Taxpayers Union Foundation.