Murphy wants to change how remote workers are taxed. But it’s not simple, experts say.

New Jersey is set to tackle the controversial issue of how remote workers employed by out-of-state companies are taxed, something that took on heightened urgency since the COVID-19 pandemic when many people started working from home, Gov. Phil Murphy announced last week.

The governor revealed a bipartisan proposal for new legislation that addresses the issue, which Murphy said is costing the state billions of dollars of revenue. Right now, New Jersey residents pay income tax to their employer’s state and receive a credit from New Jersey so they’re not double-taxed on the state level. But now, with thousands of residents working remotely, New Jersey wants to get those tax dollars since employees are physically working in New Jersey.

“The proposals I’m announcing today, while supporting our hard-working residents in their efforts to dispute such taxation, will help promote employment in New Jersey and counteract lost tax revenue to our neighbors.” the Democratic governor said in a statement.

Though Murphy had few details on the exact language of the proposal, at issue is a provision known as the “convenience of the employer” rule.

States with the rule, like New York, levy income tax based on where an employee’s company is based, not where the employee actually does the work.

The new proposal would incentivize New Jersey residents who work for New York companies, but who physically work in New Jersey, to ask New York — in court, if necessary — to send the income taxes they paid to New York to New Jersey instead. New Jersey residents who prevail in court would then receive New Jersey tax credits worth 50% of the amount recovered from New York, under the incentive New Jersey is proposing.

Supporters of the measure say it’s a win-win: New Jersey would get more in tax revenue and individual taxpayers would get valuable tax credits.

But at question is how much of a burden this would be on New Jersey taxpayers and whether any would want to take the state up on the offer and fight it out in court, experts said. The governor’s office declined to comment on the specifics.

Kenneth Bagner, a certified public accountant with Sobel and Co. in Livingston, said the administrative hurdle may be too much of burden for the average worker. “Most people will not be able to afford that,” he said.

“New York is taking a ‘tough stance’ that you still are a New York worker if your office is in New York and you work remotely in New Jersey for your own convenience,” Bagner said, noting that he believes the issue will continue to be fought over in the trials.

The issue of credits for taxes paid to other states ramped up during the shutdown, said Bernie Kiely, a certified financial planner and certified public accountant with Kiely Capital Management in Morristown. The US Supreme Court declined to take up a case in which New Hampshire tried to challenge Massachusetts on the same issue. The Murphy administration filed an amicus brief in late 2020 in support of New Hampshire.

A second part of the proposal would create New Jersey’s own “convenience of the employer” rule, which the governor’s statement said would “start the process of creating parity with New York.” It would subject out-of-state residents who work remotely for a New Jersey company to pay income tax to New Jersey instead of to their resident state. To avoid being double-taxed at the state level, New York and other states would have to provide a credit to those workers.

The proposal would also create a $10 million pilot program to provide grants to businesses that assign their employees to New Jersey locations. It would be administered by the New Jersey Economic Development Authority.

“These proposals will help stop, once and for all, the unjust taxation of New Jersey taxpayers while further boosting our fiscal health and burgeoning economy,” state Sen. Jon Bramnick, R-Union, said in a statement.

The measure would need to be passed by both houses of the state Legislature — the Senate and Assembly — before Murphy could sign it into law.

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Karin Price Mueller may be reached at KPriceMueller@NJAdvanceMedia.com. Follow her on Twitter at @KPMueller.

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