By Erica E. Phillips / CTMirror.org

It’s long been a sore subject for Fairfield County residents working for New York City companies — New York law requires workers to pay income taxes in the state where their employer is located, and New York’s tax rates tend to be higher than Connecticut’s.

It’s also a source of irritation for Connecticut leaders, who conceded in 2019 to credit the tax bills of residents by the amount of income tax they pay to those states with laws like New York’s, where their jobs are located. 

That cancels out hundreds of millions of dollars in revenue to Connecticut each year, administration officials estimate.

Gov. Ned Lamont’s budget chief, Jeffrey Beckham, this week unveiled a new plan to help the state recoup some of that tax revenue from New York. The proposal, which would require the General Assembly’s approval, offers a tax break to Connecticut residents working remotely for New York companies if they sue the state of New York to recoup taxes paid between 2020 and 2023 — and win.

“Due to New York’s overreach, these residents pay tax to New York instead of to Connecticut, for work performed in Connecticut,” Beckham said. “This is an incentive to Connecticut residents who challenge New York’s tax. They’ll have to go to court.” 

If a plaintiff wins his or her case, and New York refunds their tax payments, Beckham explained, they would receive a one-time 50 percent discount on the taxes owed to Connecticut for those years.

Mark Boughton, commissioner of the state’s Department of Revenue Services, said the rules, known as “convenience of the employer,” currently go both ways. New York residents who work for Connecticut businesses pay Connecticut taxes. 

But it’s not an even trade, he said, since many of the New York-based jobs at issue — Fairfield County residents who work in finance, for example — pay much higher wages than the Connecticut jobs. “We operate at a loss,” he said of the disparity in tax revenues.

“We want New York to eliminate the practice,” Boughton said. “If they stand down, we’ll stand down.”

That’s unlikely to happen without a court ruling.

Edward Zelinsky, a New Haven resident and law professor at Yeshiva University’s Cardozo School of Law in Manhattan, has been waging his own legal battle over New York’s tax rules for more than two decades. 

He challenged New York’s law in administrative tax court in 2003, and lost. Then he appealed the decision, and the U.S. Supreme Court ultimately declined to review it.

Despite losing that case, Zelinsky has become, in his words, “the gray-haired poster boy for this problem.” He has helped draft federal legislation to end the practice. He is now representing himself again before the New York Tax Appeals Tribunal — this time over income taxes he paid to New York in 2019 and 2020, a period during which he was working remotely in part because of the COVID-19 pandemic.

Zelinsky said he thinks Lamont’s proposal is smart, although he’s not sure any legal challenges brought by Connecticut residents would be successful. But that may not be the point, he said. 

“Remote work is for many people the new normal, and the governor is doing the absolute right thing by highlighting this problem,” Zelinsky said. 

“I’m skeptical as a practical matter that this proposal is going to do much good … That’s not so important. What is important is that the governor keeps articulating that this is an unconstitutional overtaxation of Connecticut residents and we need to keep calling it out,” he said.

The more people are aware of it, the more likely there could be some resolution, Zelinsky said. That could take the form of a ruling in his favor in his current case in New York, or Congress finally passing legislation — which has been raised now several times. “Sunlight is the best disinfectant,” he said.

In another similar lawsuit, New Hampshire sued Massachusetts in 2020 for taxing its residents during the pandemic lockdown. But the U.S. Supreme Court declined to take up the case on appeal, saying the issue needed to percolate further in lower courts. (Massachusetts was taxing New Hampshire residents working remotely during the pandemic under a temporary rule that has since expired.)

That’s reason enough for the state of Connecticut not to file a similar case against New York, Zelinsky said, because it wouldn’t likely be taken up so soon after New Hampshire’s case fizzled. 

Robert Morris, a tax lawyer with Pullman & Comley in Bridgeport, said it’s worth considering the issue from the employer’s point of view. Businesses have to pay taxes to the state in which they operate, and they could be held liable for not withholding taxes on their employees’ income, Morris said.

On the other hand, if a New York business withholds Connecticut taxes from a remote employee, it’s possible the business would have to register to operate in Connecticut, which adds costs, Morris said. This gets at why the laws are known as “convenience of the employer rules,” he said.

“Everybody’s caught in a quandary of who collects and does the employee have to pay tax to two states. And we all know that’s not very popular.”

Still, Morris said he thinks Lamont’s proposal is “kind of brilliant” because “it is putting this whole issue before the courts.”

Boughton said he’s optimistic for a favorable verdict — if any Connecticut residents, incentivized by this proposal, were to launch a legal challenge in federal court — but he acknowledged the process could be time-consuming and expensive. 

“It’s a long play,” he said. “It’s not something that’s going to happen overnight but you’ve got to start somewhere.”