Small changes could make Minnesota the leader for remote workers

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The pandemic ushered in many changes to American life, to the degree that the tax changes it brought were not initially at the forefront of taxpayers' minds. But with remote work seemingly here to stay, taxpayers are now having to grapple with the fact that while remote work offers new opportunities and detaches workers from having to live in areas just because of job opportunities, it also means changes to tax obligations. While the North Star State is well-positioned in the race to attract remote workers, policymakers in St. Paul could still make changes that would both protect taxpayers and make Minnesota one of the best states in the country in the new economy.

Remote workers will find Minnesota hospitable for many reasons — first and foremost, the fact that the state boasts decent filing and withholding thresholds. Filing thresholds represent the number of days a taxpayer can work or amount of income a taxpayer can earn in-state before being required to file an individual income tax return. Note that "earning income in-state" can represent anything from being a contractor who does a job in a state to a remote worker working from a family member's house while visiting.

Minnesota exempts taxpayers from filing obligations up until they earn a certain amount, or $12,515 for this past year. While this is higher than many other states, wage-based thresholds, even high ones, are less easily tracked than day-based thresholds. It is far easier for a taxpayer to know that they can work 30 days in a state without incurring tax filing obligations than to try to translate a wage threshold into days, even for workers earning a regular salary.

Similar to filing thresholds are withholding thresholds. These represent the number of days a taxpayer can work or amount of income a taxpayer can earn in-state before their employer is required to withhold income taxes on their behalf. For businesses with mobile employees spending a short amount of time in many states, low withholding thresholds can result in tax compliance obligations piling up.

Here again, Minnesota sets a threshold of $12,515. Wage-based withholding thresholds are even more difficult for employers to keep track of than wage-based filing thresholds are for employees — while salaried employees are generally aware of exactly how much they make, employers, especially those with many employees, would find it even harder to translate wages into days worked.

One area where Minnesota should be doing far better than it does is on reciprocity agreements. Reciprocity agreements are agreements between states to require taxpayers who commute across state lines only to pay taxes to their state of residence. These agreements protect taxpayers from being caught in a tax tug-of-war between their state of residence and the state they commute into, and the consequential potential for double taxation.

Minnesota technically does what every state should do — extend a unilateral offer of reciprocity to any other state willing to provide the same treatment to Minnesota taxpayers. As a result, Minnesota has reciprocity with North Dakota and Michigan. However, even though Minnesota's neighbor Wisconsin does the same thing, Minnesota and Wisconsin do not have a reciprocity agreement after Minnesota's revenue commissioner backed out of a past agreement.

A renewed reciprocity agreement with Wisconsin would cover over 60% of incoming commuters into Minnesota, multiplying the percentage of incoming commuters covered by reciprocity agreements by more than five. Minnesota should also revoke the statutory authority granted to commissioners of revenue to back out of agreements for arbitrary reasons.

In the Remote Obligations and Mobility (ROAM) Index, which ranks states on how their tax codes affect remote and mobile workers, Minnesota comes in with the fourth-highest score of any state that levies an individual income tax. With minor reforms, Minnesota can further improve upon how it treats remote workers.

While Minnesota could improve in all three of these areas, it is still better-positioned than nearly every other state with an individual income tax to welcome remote workers. Some minor improvements to its tax code could really set the state apart as a place remote and mobile employees want to go to and — just as importantly — don't have to avoid. That could make the Land of 10,000 Lakes into a land of 10,000 new remote workers.

Andrew Wilford is a senior policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.