In his new essay, Agglomeration and State Personal Income Taxes: Time to Apportion (With Critical Commentary on New Hampshire’s Complaint Against Massachusetts), forthcoming in the Fordham Urban Law Journal, Darien Shanske offers his thoughtful and sharp analysis to show the weakness of New Hampshire's contention. There are many fascinating issues and arguments in taxing nonresident remote workers' multistate income, and I find it is quite reasonable for people to agree with some issues and disagree with others, as I have done so in my paper, Taxing Teleworkers, forthcoming in the UC Davis Law Review. Personally, I have enjoyed my academic engagement with the author on this topic and am thrilled to have an opportunity to introduce and review the author's paper.
The author and I agree that, on a procedural level, New Hampshire faces many challenges as to whether New Hampshire has standing and whether the Supreme Court should exercise original jurisdiction over its claim. We also agree that Congress is the ideal candidate to offer a long-term, forward-looking, and harmonized solution to this problem. However, we disagree in part with the merits of New Hampshire, which makes this academic engagement more interesting.
An important contribution of this paper is that it brings the perspective of "agglomeration economics" to the table. The author presents that many of New Hampshire's residents cluster around Massachusetts's border because of its proximity to Boston. Those individuals are functionally residents of the greater Boston metropolitan area. Agglomeration economics explains why such metropolitan areas exist. Density in businesses, especially similar types of business, can be a big positive, producing many benefits of agglomeration, such as reduced transportation costs, larger market size, and information spillovers. Greater Bostonians, including New Hampshire residents, enjoy such benefits, and that is why Massachusetts feels it is necessary to tax them during the pandemic as a source state. The problem arises because major agglomerations cross state lines, as in the case of the Boston metropolitan area, resulting in a variety of multistate tax issues.
Building on the insightful account on the background of New Hampshire’s tie to Boston, the author questions the first issue of whether the Supreme Court should impose a physical presence rule for nonresident remote workers. In emphasizing the move from physical presence in South Dakota v. Wayfair, Inc, the author disagrees with the idea of having a physical presence requirement, stating similarly to the majority in Wayfair that requiring physical presence as tax nexus is problematic in the age of the internet. I could not agree more with the author as to the issues relating to establishing a businesses' nexus, as addressed in Wayfair. Still, Ed Zelinsky (Cardozo) and I have a partially different view from the author on its application for individuals. Wayfair was a case about the collection of the use tax by businesses. There are important differences between individuals and businesses, and (physical) residence will become more important for natural persons, especially in the digital economy. Although the author acknowledges such differences, he suggests that such differences are insufficient to make it into a constitutional review. His distinction between normative policy discussion and doctrinal analysis is consistent throughout the paper, which I respect despite my partial disagreement with some of the issues.
The author, other scholars, such as Walter Hellerstein (Georgia) and Ed Zelinsky, and I are more agreeable to the second issue of apportionment. Massachusetts' temporary regulation does not apportion the nonresident remote workers' income between source and residence states but rather allocates such income entirely to the source state. I think we all believe that the rule requires apportionment. The author agrees that apportionment should be required as a part of sound policy but disagrees that such apportionment is required as a matter of law. The author argues that the standard for apportionment is flexible, and thus, it seems reasonable for Massachusetts to assume that it remains the source state during the pandemic. This argument is well supported by agglomeration economics. However, I would like to pitch another common scenario during the pandemic, where people from the big cities have moved to suburbs, second-tier cities, and "Zoom towns" in scenic areas near ski slopes or national parks, like Utah or Florida. The pandemic is reshaping where and how we work, and agglomerations may not matter very much in the future. Nevertheless, at least in New Hampshire, it is true that the majority of taxpayers affected by Massachusetts' rule live in New Hampshire from the benefits derived from agglomeration economics. As we wait for the Supreme Court decision on granting certiorari, I often imagine how this scenario would change if another state that is not attached to metropolitan areas would have filed this lawsuit jointly with New Hampshire.
Although the author criticizes New Hampshire's arguments as a matter of constitutional law, he acknowledges that current state law regarding the sourcing of employee income is not ideal from a policy perspective. He offers a brilliant and well-balanced normative proposal, where source states and residence states reasonably divide the nonresident commuters' income based on formulary apportionment. Since both residence and source states contribute to such income, both should have a claim on it. In particular, a source state's taxing right can be justified by the logic of agglomeration discussed above.
Now, if this review made you interested in the author's suggestion on the specific formulary apportionment in futuristic yet realistic hypotheticals of the digital economy, I would consider my work a success. Overall, I highly recommend this paper, which offers a top-notch blend of multistate income tax, urban economics, constitutional law, and digital economy.