ALBANY – The Cuomo administration is proposing several major changes in the state’s decades-old tax code as a way to lessen the impact for some New Yorkers who face financial hits under the federal government’s new tax law.
“We’re going to do whatever is necessary to protect New Yorkers,’’ Gov. Andrew M. Cuomo's budget director Robert Mujica said during a briefing Monday morning at the Capitol.
The plan, the precise details for which will not be available until Thursday, will include:
- A new payroll tax on employers as a way to benefit employees who will lose the ability to deduct some state income taxes under the new federal law.
- Creation of charitable donation programs, which would permit, for instance, residents to lower their school property tax bill by contributing to a new charitable program created to help fund schools.
The proposal, in the works for weeks, deals with a complex tax situation facing some residents who live in a state with relatively high taxes and home to one of the nation's most complicated tax codes.
Payroll tax plan
Federal law starting in 2018 limits the amount paid in a year on state and local taxes that can be claimed as deductions on federal forms to $10,000.
The Cuomo plan seeks to try to help at least some New Yorkers – most of them with higher incomes and living in high property tax counties downstate – to take take advantage of taxes still fully deductible under the federal law.
One of those is the payroll tax. The new Cuomo plan seeks to shift some tax obligations onto employers through a tax they would pay on each worker's salary. The employers, though, would be held harmless by being able to deduct those taxes on their federal taxes.
In some cases, budget watchdogs say, companies would be able to subsidize the new state payroll tax by lowering the gross salaries of workers. Workers' take-home pay, though, would not drop, Mujica said, because their overall state income tax burden would fall.
By phasing the plan in over three years, Mujica said he believes workers won't see the drop in their overall gross salary. That is based, though, on the premise that those workers would get annual salary bumps from employers who choose to be affected by a new payroll tax.
E.J. McMahon, research director of the Empire Center for Public Policy, said the payroll plan will not have broad appeal with either companies or workers. “It’s kind of a solution in search of a problem,’’ he said of the idea. He said the payroll idea will appeal to a relatively small number of highly profitable firms that pay top salaries – and most of those will be downstate.
Moreover, most individuals and corporations in New York are getting a federal tax cut. “So why the need to distort and complicate your life in relieving them of a problem they don’t have?’’ McMahon said.
"Employers will have to carefully consider the shift of tax liability and administrative costs when evaluating this election,'' Heather Briccetti, president of the Business Council of New York State, said of the new optional payroll tax proposal.
Like other groups, the business lobbying organization said New York State is being hit in some areas by the new federal law because it has such high state and local taxes.
"The Council continues to emphasize that with multi-year, multi-billion (dollar) budget deficits, New York needs to more fully examine its spending practices, especially in major programs such as Medicaid and education, and determine why our costs are so much higher than other states without the results to match,'' she said.
From Cuomo's perspective, the payroll tax works because such taxes would be deductible for employers on their federal filings. It would benefit workers who itemize their taxes and face new limits on what they can deduct in state income taxes.
The whole idea is voluntary, and many employers already have raised concerns about the potential for any range of complicated consequences. It also would be phased in over three years starting Oct. 1.
“No business has to do it at all,’’ Mujica said of what he called the new “employer compensation expense tax. “All we’re providing is an opportunity for businesses who want to help their employees,’’ he added.
If a worker’s gross salary does decline, it is uncertain what those impacts might be on such things as future social security payments or private pensions through their employers.
Charitable donation plan
Another Cuomo plan outlined Monday by Mujica is creation of new education and health care charitable organizations that residents could give to and then see tax obligations lower by a like amount.
It would be a way, for instance, for residents to give money to benefit their local school district, which would then cut – by the amount of the donation – their school property taxes. Someone could, under the plan, shift the $10,000 annual property tax from a direct school district payment to a new charitable organization formed specifically to benefit that one district. Like the payroll tax plan, the charitable donation program would be voluntary on the part of schools.
The administration Monday also talked about forming two state-controlled charities for education and health care. An administration official punted until Thursday when asked for specifics about how the state and local charities would work.
Most budget watchdogs have in recent weeks said they believe the charitable donation idea is the more workable of various plans that have been considered.
Unlike plans kicking around in the Legislature, donations under the new Cuomo plan would not get a dollar-for-dollar match in state tax credits. But Mujica said donations would be worth up to 85 percent in state income tax credits.
The new contribution idea, for instance, would only work for the one-third or so of New Yorkers who itemize their federal taxes, and that number is expected to drop sharply on 2018 tax returns thanks to a big increase in the standard deduction under new federal laws.
Assemblyman Robin L. Schimminger, a Kenmore Democrat, last week introduced a bill to create a statewide charitable group – overseen by State Comptroller Thomas P. DiNapoli – that would permit residents to voluntarily contribute to the fund to help pay for the state’s education and health programs. Donors would then get a federal tax break and, in addition, get a dollar-for-dollar match via a state tax credit.
“I think we should not do the payroll tax because a new tax is created and there is mischief both now and down the road by way of enriching state coffers. I don’t have the trust there … I think it’s a non-starter,’’ he said.
But a charitable donation program “is cleaner” as a way to lessen the impact for people who are facing a higher federal tax bill because of restrictions on state and local tax deductions.
The administration did not release bill language for the new plans. That will come when Cuomo proposes his amendments on Thursday to his own 2018-19 budget proposal for the state government.
End-runs in question
The key question is whether the Internal Revenue Service – not to mention the White House or Congress – will even go along with high-tax states like New York that are devising these end-runs to the new federal tax law.
Driving all this is the federal law’s new limits – $10,000 – on how much taxpayers can deduct on their federal forms in taxes paid to state and local governments, such as school property taxes and state income taxes. The Cuomo administration has said 3.3 million New Yorkers itemize their federal taxes, and that 1.7 million of those pay state and local taxes in excess of $10,000 annually.
Most New Yorkers are going to get a tax cut, at least for the next several years, under the federal law.
But the Cuomo administration says the law will cost $14.3 billion in lost federal deductions for New Yorkers; it has not released a number, though, for the level of federal tax cuts that residents will get, a lapse that critics say has blurred the tax debate in Albany.
Mujica said the tax plans would be “revenue neutral” for the state government.
New York and several other high-tax states are also planning to sue the federal government to try to overturn the federal tax law approved in December; they say it unfairly targets Democratic states in order to give larger tax cuts to Republican states.