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Remote jobs are good for workers, but not for city budgets

In the 1970s, faced with both an oil embargo and a new clean air law, a NASA engineer proposed telecommuting as “an alternative to transportation”. He was certain that technology would make this possible, even if the personal computer and the Internet had not yet entered the workplace.

During the pandemic, remote work has helped employers and workers in certain fields balance public health imperatives with productivity demands. It has become clear that many jobs can be done just as well, if not better, out of the office.

Even when case increases are a thing of the past, working from home will be increasingly important to the future of work. A new analysis from the Pew Charitable Trusts reveals that this can lead to problems for local government.

“Fewer commuters – or workers who commute less often – could translate into a shrinking local revenue base and contribute to long-term fiscal challenges for local governments,” he concludes. Exactly how this might happen varies from city to city.

Dimensions of risk

The Pew analysis involved data from 10 geographically diverse cities. It examined the interaction between the share of jobs held by workers living outside each city and the share of all jobs in occupations such as finance, management or other occupational sectors most likely to lend themselves to telecommuting.

Three tax sources can be affected if workers do not live where they work and can do their jobs from home: property tax, sales tax and income tax. The impact on these revenue streams in a particular city has little to do with where it is in the country. “It’s more the unique characteristics of the city, the type of jobs they have and the way their tax code is organized,” says Adam Levin, a state fiscal health project officer at Pew.

The more a locality relies heavily on property taxes, the less impact the reduced number of commuters could have, assuming there is no exodus of residents choosing to relocate and work remotely. An increase in telecommuting would have a different meaning for a jurisdiction with a high percentage of commuters that relied heavily on sales taxes for its budget. A city with a high proportion of commuters and workers whose jobs don’t really require them to go to an office building could lose workers who pay more payroll taxes and spend more when they’re in town.

For example, payroll taxes accounted for nearly half of Philadelphia’s tax revenue, according to an earlier Pew report. He cites an estimate that between 14 and 27 percent of city-employed workers who weren’t working remotely before the pandemic will do so in the future.

The city recently updated its FY22 budget projections based on the fact that commuters aren’t coming to the city as often, Levin says, with “optimistic” and “pessimistic” scenarios. “For the optimistic scenario, the payroll tax was $51 million less than they originally projected; for the pessimistic scenario, it was $128 million less.

To hedge against such losses, he says, cities could consider modernizing their tax base by taxing online goods and services more or possibly sharing services with other local governments to reduce costs. Transportation infrastructure investment planning, now spurred by an influx of federal funds, could take into account any projected long-term impact of remote working, given that long-term maintenance of systems will depend on tariffs.

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The relationship between the share of jobs held by commuters and the share of jobs in sectors most suited to remote working is an indicator of the potential for lost tax revenue. San Francisco, for example, has a large share of commuters and a large share of high-paying jobs that could be done remotely.

No turning back

Before the pandemic, about 6% of Americans worked remotely all the time. In October, 25% of full-time workers in the United States, including 40% of all white-collar workers, worked exclusively from home. According to a Gallup poll, about half of workers who currently work remotely at least part of the time would prefer a hybrid work schedule and about 40% want to work only from home.

As frontline workers in the public and private sectors are well aware, some work must be done in person. The McKinsey Global Institute has estimated how much work in various industries can be done remotely, with no loss in productivity. The figures vary widely, ranging from just 8% in accommodation and food services to 76% in finance and insurance and 68% in management.

Nine out of 10 full-time workers want to work from home at least part of the time. Those looking for a job are turning to positions with the ability to work remotely, says AnnElizabeth Konkel, an economist at the Indeed Hiring Lab.

A Microsoft study of more than 30,000 workers in 31 countries analyzing “billions of productivity and work signals” from its software and LinkedIn found that 70% want flexible working options to continue. Two-thirds of employers are considering redesigning their facilities to accommodate hybrid working.

The Bureau of Labor Statistics has been tracking a nationally representative sample of men and women born between 1980 and 1984 since 1997, tracking the impact of their education and other factors on their labor market experiences. Between February and May 2021, about 4 in 10 men and women in this cohort who had a bachelor’s degree or higher worked solely from home.

Telecommuting will be a post-pandemic norm for many workers, but no “norm” has yet emerged regarding how states will consider the tax obligations of employers with remote workers. Some have issued guidelines during the public emergency that may not reflect future policy. How might the policies be different for full-time remote workers and those who do part of their work from home and part from an office in another jurisdiction?

CPA Journal recently assessed the tax implications of remote working for employers, concluding that “the shift to remote working should give employers a lot to think about in terms of income tax, sales tax compliance, withholding source and other corporate tax policies and procedures, given the varied – and often conflicting – approaches taken by states.

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