Could States and Municipalities in California Use Taxes to Limit Remote Work in the Future?
Many large California employers have been granted significant state and local tax incentives to establish the physical locations of their businesses in California, or within certain municipalities in California. These can come in the form of enterprise zone tax incentives, direct tax incentives, or other similar programs. The purposes of these tax incentives are to (a) spur economic growth and activity in the area; and (b) increase the tax base in the area by bringing in well-paid jobs, where the income is taxed. However, this economic growth does not happen if the majority of the workforce is working remotely. The tax incentives disappear when employees work remotely in a different state or jurisdiction.
When these arrangements were contemplated, well before the COVID-19 pandemic, the concept of large portions of the workforce working remotely was never considered (although New Jersey may have been ahead of its time requiring workers to show up at least 80% of the time – but paused this requirement during the pandemic). Now state and local governments, including those in California, are starting to realize that the fluidity of where workers are located is a problem, and are looking at this issue more closely as it could influence the future of remote and hybrid work.
Bloomberg Law published an article earlier this week addressing this topic (link to article here - subscription required]. The article discussed the fact that some cities are starting to address this issue, but there is a fine line on what can be done. If states and municipalities set the return-to-office bar too high, businesses that want to maintain flexibility for their workforce may simply move to a location that does not disincentivize remote and hybrid work. If the bar is set too low, then the state/municipality may not be benefiting much from the tax incentive because a significant number of workers will not be in the office stirring up local economic activity and some may be working in distant locations where they are paying taxes elsewhere. The Bloomberg Law article discussed some examples of cities already addressing this issue such as Plano, Texas and Allen, Texas, two growing Dallas suburbs that recently agreed to partially count remote and hybrid workers to qualify for their local business incentives.
What does all of this mean for the future? This remains unclear. However, this is something to watch in California. As recessionary times loom, states and municipalities will be watching their tax revenues carefully. If this recent trend spreads to our state and local municipalities, California businesses seeking to maintain the benefits of lucrative tax breaks and incentives may be required to keep close tabs on who is in the office or risk losing them. California employers may start to put more pressure on employees to return to the office simply to ensure that they can qualify for tax benefits.
If California or our local municipalities start to act in this area and add in-person requirements to qualify for tax incentives, CDF will report about it here.