[Real Beat] "No Tax Breaks for Working from Home"... US Local Governments and Companies Face Dilemma

How Changes in the Workplace Have Transformed Cities④

Editor's Note[Jjinbit] is a shortened form of 'Jeong Hyeonjin's Business Trend' and 'Real Business Trend,' a segment that showcases trends in changes in work.

[Asia Economy Reporter Jeong Hyeonjin] State and city governments across the United States are deeply considering whether to revise the tax incentive programs they have provided to local businesses. With the spread of remote work and hybrid work (a mix of remote and office work) due to the impact of COVID-19, tax revenues and local economies have been hit, prompting a review of whether the criteria for tax reductions, previously granted for this reason, should be changed.

On the 21st (local time), Bloomberg News reported an article titled "City tax incentive regulations tightening could threaten remote work." Bloomberg stated, "These contracts were made in the pre-pandemic era when going to the office was taken for granted," and conveyed the atmosphere that local governments are debating whether to strictly enforce existing regulations or completely revise the content itself.

[Image source=AP Yonhap News]

◆ "Contracts made before the pandemic... considering revising the content"

According to the report, U.S. state and city governments have annually signed contracts with local businesses before the pandemic, offering tax reduction benefits if a certain proportion of employees come to the office. Even if employees did not commute to the office, tax reduction benefits were granted if they resided within the region. This benefit was mainly provided considering that income tax is paid to local governments by the headquarters where the office is located.

At the same time, when employees commute to the office, consumption increases at nearby restaurants and cafes, and the value of commercial real estate rises. When streets are bustling with people, the likelihood of crime tends to decrease. Local governments have viewed office attendance as important for revitalizing the local economy and have supported it accordingly.

Seth Martindale, Senior Director at global comprehensive real estate services firm CBRE, said, "The concept of remote work, which must now be included in contracts, was not included," adding, "COVID-19 has changed the overall environment. Everyone is currently in a learning phase."

◆ Giving up $17 million in tax benefits... sensitive to income tax direction

Notably, New Jersey in the eastern U.S. and Texas in the south-central region are local governments that have set specific proportions of employees required to commute to the office to receive tax reductions. Before the pandemic, New Jersey required over 80%, and Texas required over 50% of employees to qualify for tax reductions. They temporarily suspended the application of these rules during the COVID-19 period but have been demanding compliance with contract terms since last year.

New Jersey announced that to continue receiving tax incentives, employees must commute to the office three days a week, and Texas declared that benefits cannot be provided unless more than half of working hours are spent on-site.

[Image source=Reuters Yonhap News]

As a result, iCIMS, a software company that relocated its headquarters to New Jersey in 2017, adopted a fully remote-first policy internally after the COVID-19 outbreak and consequently lost the tax incentives it had been receiving from the state government. Bloomberg cited New Jersey government data reporting the amount was at least $13 million (approximately 1.7 billion KRW). The company stated, "We frequently measure employees' work environment preferences and continue to hear how important a remote-first work environment is to our team."

As more companies make such choices, the New Jersey legislature somewhat relaxed the criteria for providing tax incentives in December last year, considering companies implementing office return policies. By submitting a separate application, companies can receive benefits if they meet the criterion of commuting to the office once a week until the end of this year. Although over 100 companies, including JP Morgan and RBC Capital, have contracts with New Jersey for tax incentives, no company has submitted an application to use this system so far, a New Jersey Economic Development Authority official told Bloomberg.

Bloomberg also reported that other states have not yet set specific requirements. The reason state or city governments have included office attendance or in-state residency conditions in tax incentive contracts is related to income tax. Some local governments' stance is that as long as workers remain in the state and pay income tax, the work style is not a major issue. Ohio, Kansas, and North Carolina recently clarified that even if employees work remotely, they will not be excluded from tax reductions as long as they reside within the state.

The problem arises when a company’s headquarters is located in an expensive area, and employees leave the area due to remote work. This can change the entity collecting income tax, forcing local governments to consider the effects accordingly. From the perspective of state or city governments, strengthening office attendance criteria may lead companies to relocate to other regions, while lowering the criteria could reduce tax revenues and cause budget shortfalls.