Your example will be a fascinating one for sure. Let’s take it one step further: What about employees who are citizens of foreign countries? Are they going to pay state income taxes too?
A. Where do you live?
B. Where do you work?
Income is taxed at the place where it is earned. If you live in another state your home state may require you to file a tax return and report the income, but in my case the "home" jurisdiction gave credit for the taxes paid to the other jurisdiction -- so the taxpayer often owed nothing to the "home" state.
Simple example using round numbers and no deductions ...
1. You live in Connecticut.
2. You work in New York.
3. You earn $100,000/year.
4. New York's state income tax rate is 5%. You pay New York $5,000.
5. Connecticut's state income tax rate is 4%. You file your Connecticut tax return and report your $100,000 as income, but you also report that you've paid $5,000 to New York.
6. Your Connecticut tax liability of $4,000 is offset (and then some) by the $5,000 you've already paid to New York.