Incentives for remote employment: What the states can and should do
INSIGHT ARTICLE |
Authored by RSM US LLP
As the economy experiences the ongoing COVID-19 pandemic, businesses across the nation are contemplating having some or all of their employees work remotely on a permanent basis. The lingering health crisis and continued government restrictions are important factors in making this determination. But, businesses are realizing that a remote workforce may be a more efficient and effective way of conducting operations. The pandemic has proven that, in many industries, remote employees can perform their duties outside the traditional workspace. Businesses are beginning to see the economic advantages of decreasing their real estate footprint. Employers can reduce the costs of office space and infrastructure necessary to house large numbers of workers. Businesses are also acknowledging that for many employees, working from home is significant benefit. Workers can eliminate commuting costs and other expenses of working at a traditional business location.
Some industries are likely to see virtually all employees work remotely. These include, for example, financial services, professional services and technology. Even companies in manufacturing and retail will have some employees work remotely. Accounting, record keeping, human resources and other administrative responsibilities can be performed outside the office. This new phenomena will affect existing operations; many businesses will simply declare that all or some employees will work remotely. It will also affect business planning. For example, a business looking to greatly expand its customer service operations will no longer be focused on a call-center building in a particular state. Under the new model, customer service employees could work anywhere provided they have the requisite equipment and internet access.
The movement toward a virtual workplace provides state and local governments an opportunity to encourage businesses to create a remote workforce in their jurisdiction. There are obvious benefits to the states and their economies. New remote workers, particularly higher compensated employees, will increase the overall income and wealth of the state. They will spur more consumption, increase residential real estate values, and perhaps most importantly contribute to the tax base. Remote employees will pay income, sales and property taxes. Moreover the state will not incur the costs of roads, public safety and other infrastructure costs of a new physical business. It should be noted that incentives aimed at encouraging remote workers will likely be far less expensive than traditional incentives and credits which usually involve multiple programs around facilities. Finally, local governments will benefit from a shift in incentives goals as new programs aimed at remote workers will not involve expensive property tax abatements and credits.
Revising Existing Credit and Incentive Programs
The easiest and most efficient way to encourage companies to locate remote employees is for a state to revise existing credit and incentive programs. Most current programs are built around fostering development at a particular location – a factory, a call center, an office or similar space. Most of those programs can be legislatively changed to encourage remote job creation anywhere in the state.
Business income tax incentives
Many states imposing business income taxes provide incentives and credits tied to job creation. These incentives almost always have an investment requirement in addition to a new job creation requirement. Most importantly, the job creation and the investment are tied to a particular facility. For example, the Arizona Quality Jobs Tax Credit provides up to a $9,000 nonrefundable income tax credit for each qualifying new job. But, the recipient must make a capital investment of at least $500,000, depending on the location of the facility, to qualify. Both the job creation and the investment must occur at the same facility. This type of incentive is typical. States could easily create a new category of eligibility under these types of existing programs whereby the investment requirement was eliminated and the job creation was measured on a state-wide basis and not tied to a physical facility.
A growing number of states provide firms locating or expanding the ability to retain some portion of withheld personal income taxes. The Illinois Economic Development for a Growing Economy (EDGE), for example, provides tax incentives to encourage companies to locate or expand operations in the state. EDGE tax credits are available to qualifying companies, equal to 50% of personal state income taxes withheld from the salaries of employees in newly full-time created jobs and 10% of training costs associated with new employees. Companies locating or expanding in underserved areas may qualify for a credit equal to 75% of the personal state income taxes withheld from the salaries of new employees as well as 25% of the withholding for jobs retained in that area. Laws such as the EDGE program could be revised to provide incentives for remote job creation while preserving the program’s original intent to increase business in Illinois.
Grants and loans
There are numerous grant and loan programs associated with state economic development. Many of those programs are aimed at fostering investment in the state. For example, Connecticut’s Economic and Manufacturing Act provides direct loans for, among other activities, acquisition of real property, construction, infrastructure improvements and relocation of facilities. Another example is North Carolina’s Job Development Investment Grant which is a performance-based, discretionary incentive program that provides cash grants directly to new and expanding companies to help offset the cost of locating or expanding a facility in the state. These types of loan and grant programs can be revised to encourage remote workforce development, versus job creation at a specific location.
Sales and use tax incentives
Some states provide sales and use tax incentives as part of their economic development programs. For example, Arkansas enacted the “Tax Back” program, which provides sales and use tax refunds on the purchase of building materials and taxable machinery and equipment to qualified businesses investing the minimum threshold and who either 1) sign a job creation agreement under the Advantage Arkansas or Create Rebate programs within 24 months of signing the Tax Back agreement or 2) have met the requirements of an Advantage Arkansas or Create Rebate agreement within the previous 48 months. Other states exempt from tax purchases of equipment used in computer data centers. Arizona’s Computer Data Center (CDC) Tax Exemptions program provides exemptions from sales and use tax for up to 20 years in connection with purchases of CDC equipment by owners, operators and co-location tenants of computer data centers certified by the Arizona Commerce Authority. In all cases, these types of exemptions are often also tied to capital investments in the state. Such exemptions can be expanded to home office equipment, such as computers, printers and phones, purchased by a company for a remote employee in the state.
State and local governments may also consider new, bolder, ideas to lure remote workers.
Business income taxes
There are ways states may encourage locating remote employees beyond the traditional credits and incentives. For example, states could declare that the existence of new remote employees will not create nexus for income tax purposes. States might eliminate remote employees from a payroll factor, thus reducing overall business income tax in many states. States might also decide that the existence of remote employees working exclusively from home does not eliminate the P.L. 86-272 protection, the federal safe harbor from state income tax when certain, limited, activities are conducted in a state.
Personal income taxes
Employees with the freedom to choose where to live and work may opt for states with no or low income tax burdens. To compete, other states may reduce personal income tax rates or provide other tax relief to individuals choosing to locate and work in their jurisdiction. States may go further and provide newly relocated remote employees with low interest loans for home purchases or cash grants to defray moving costs.
Personal property taxes
A sizable minority of states continues to impose property taxes on tangible personal property. These taxes are often imposed and administered at the local level. There are mechanisms by which states could exempt tangible personal property associated with creating a remote workforce. For example, personal computers, printers and other home office equipment could be exempt from property tax. The state would reimburse the local government for the lost revenue. Such an incentive program could save companies the cost of the tax. But perhaps more importantly, it would spare out-of-state companies from the filing and record keeping requirements of personal property taxes.
Some state governments are currently considering streamlining the often complicated rules for withholding and payroll taxes. States could at a minimum extend the reporting periods, revise burdensome forms and reduce penalties for unintentional filing errors. States, in which local governments impose income taxes, may consider a centralized withholding system whereby a company with many employees in separate locations would withhold at one uniform local rate.
Obviously, new or revised incentives aimed at encouraging workforce development will require legislative action. Depending on the details of the program, the incentives may also require administrative guidance. Businesses considering moving to a permanent remote workforce should be aware that states are actively considering such incentives. If enacted, new incentives could significantly influence where a company will want its employees to live and work. A state that eases income tax nexus rules, for example, may be much more attractive than a state that does not. New incentives may also greatly influence business planning. A company considering a major expansion in remote hiring may benefit from having all or most of those employees in one state offering sizable incentives.
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This article was written by Brian Kirkell, Rob Calafell, David Brunori , Mo Bell-Jacobs and originally appeared on 2020-08-11.
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