ALBANY – Gov. Andrew M. Cuomo thinks he has a way to end run President Trump.
If the president's federal tax overhaul plan is going to hit thousands of New Yorkers with higher tax bills, then New York will circumvent Washington by rewriting part of its complex tax code, Cuomo reasons.
But it’s not so easy.
The basic premise of the still-evolving state plan, vaguely unveiled during Cuomo’s State of the State speech last week, is to sharply reduce the state’s reliance on income taxes that employees pay by starting a new, statewide payroll tax that employers would pay.
It’s a tricky initiative, starting with the fact that personal income taxes — $48 billion — account for 64 percent of the total taxes and fees Albany collects each year.
Built into the foundation of the plan is a three-pronged directive: employees and their state tax obligations remain whole, employers would not see an increase in tax liabilities and there would be no fiscal impact on the state’s budget, according to administration officials who briefed The Buffalo News on the concepts.
“The objective is revenue neutrality for the state, neutrality for the employee and neutrality for the employer,’’ said a senior Cuomo official who spoke on condition of anonymity.
How could shifting income tax receipts that workers pay to a payroll tax system that employers fund not cost companies billions in extra taxes? There are a couple of possibilities, administration officials say.
One envisions lowering the salaries of workers. In turn, they would see their income tax payments drop. With the lower tax payments, they would end up making the same take-home pay if, for instance, their income dropped from $100,000 now to $95,000.
Companies would be held harmless for the payroll taxes they would have to pay by paying less in worker salaries and the payroll tax would be deductible on their federal corporate taxes.
It’s just one of the ideas administration officials are exploring.
Another idea is to give companies a state credit on their state tax filings to cover the cost of the higher payroll tax.
But there are hurdles. Consider the 18 percent of the workers in New York State employed by nonprofit entities like hospitals, colleges, social services agencies or by federal, state and local government agencies. Those employers, unlike for-profit corporations, do not pay a corporate income tax to the federal government and so wouldn’t be covered by a new statewide payroll tax. Administration officials acknowledged it’s a problem not yet solved.
Another problem: New York’s income tax, at different rates and different credits and deductions based on income levels and types of filing status, is considered a progressive tax system. How will state officials maintain that progressiveness if a company is charged a set payroll tax rate for employees, some of whom may be married couples with several children while others are single filers?
That, too, is unresolved.
Other issues being examined include how to deal with people who work in New York but live in another state, which is most common downstate with commuters who live in New Jersey or Connecticut.
A tax problem for some New Yorkers
Most New Yorkers, at least temporarily, are going to get a federal tax reduction under the new law Trump signed last month and that begins with the 2018 tax year. (Those people would get additional tax relief if the payroll tax idea becomes real, Cuomo officials say.)
But thousands of people — especially those with higher incomes and who reside in areas with high property tax levels — are looking at a tax hit. Cuomo says the new tax law will mean an additional $14 billion that New Yorkers pay to Washington. That’s because the new plan limits to $10,000 the amount that filers can deduct on state and local taxes — income and property — that they pay.
It’s those people who would have the most to gain under the plan Cuomo is now considering.
He has sounded alarms that the higher tax tab could drive more high-income New Yorkers to other states, and it is those wealthier taxpayers who pay a large portion of the income tax revenues that Albany relies on each year to balance its budget.
Cuomo last week said his administration is working on a couple of efforts to try to circumvent the federal tax overhaul. Cuomo said Trump and Republicans in Congress pushed the law to use high-tax states — which also happen to be blue states like New York and California — to pay for tax cuts in Republican states.
End run or appropriate response?
Beyond the payroll tax idea, the state is looking at the creation of charitable foundations, so that New York taxpayers could make contributions and become eligible for tax deductible donations to pay for state programs, such as education and health care, and then get a corresponding cut on their state taxes.
Dean Baker, a senior economist at the Washington-based Center for Economic and Policy Research, a left-leaning group, described the charitable foundation idea as “a little fishy” and one that might not be legal. But Baker has been among the nation’s earliest and loudest proponents of efforts to have high-tax states lower their reliance on state income taxes and boost payroll taxes to try to get around the new federal law.
“I don’t think it’s a good idea for states to try to game the federal tax system. But it was just so explicit that here was a tax law that screwed states that overwhelmingly vote Democratic and have high taxes because they provide services to their people,’’ Baker said. “It’s a big hit to New York. It’s a big hit to California. It’s totally reasonable for them to be looking at unorthodox measures.’’
The financial loser of what Cuomo is considering would be the federal government, which would get lower tax receipts than it is anticipating from New Yorkers to help pay for the nationwide tax cut program.
Wouldn’t Trump and Congress merely tweak the new tax law to block end-run efforts by New York and other states?
Some advocates of the payroll tax approach say such a tweak would squeeze Republicans in high-tax states who voted for the December tax law. They might find it harder to vote for something that has nothing but tax pain for their home state.
“Legally, they could do it. Politically, it would be an impossible hurdle,’’ Baker said.
“I think it would be very hard for the members of Congress who supported this unfortunate bill to now tell people we’re going to pass another bill so you can pay more taxes,’’ said Assembly Speaker Carl Heastie, a Bronx Democrat who supports the payroll tax change effort in Albany.
But White House economic adviser Gary Cohn signaled that Washington could try to undo what Cuomo might try to do.
“I understand what they’re trying to do for their cities and their states and their taxpayers. We at the federal government still have to collect revenue,’’ he said in a Bloomberg Television interview.
Of the tax circumvention ideas under review in Albany, Rep. Chris Collins, a Republican who voted for the new tax law, said Cuomo is looking at “crazy schemes to protect the high taxes in New York.”
“If Andrew Cuomo really wants to stop residents from fleeing the state and jobs going elsewhere, he needs to dramatically reduce the high income and property taxes every New Yorker faces,’’ said the Western New York congressman.
Richard Azzopardi, a Cuomo spokesman, said the governor has cut state taxes and sharply reduced the growth rate of spending since he took office in 2011. "While the congressman has sold out his constituents time and time again, Governor Cuomo is trying to protect New Yorkers from the damage Collins and his Republican cronies caused,'' he said.
Concerns are raised
The Cuomo-floated tax idea has raised a number of concerns. For starters, companies are worried about the logistics of such a sweeping state tax code change, and how they would handle internal systems to, perhaps, cut salaries and make up the difference through higher payroll taxes. Also, Cuomo is saying the effort will be cost-neutral for companies, but such promises could fade in the future when Albany is looking to raise new cash.
“That’s not an unrealistic risk,’’ said Kenneth Pokalsky, vice president of the Business Council of New York State.
He noted many of his members support the new federal tax law, which gives handsome tax breaks to corporations. Still, he said his potent lobbying group recognizes the law could have some impact on high-earning New Yorkers that, in turn, could affect the state’s economy and state budget.
Whether Cuomo’s still-evolving payroll tax idea is the right path won’t be known until the governor provides more specifics about it in his upcoming 2018 state budget plan later this month, Pokalsky said. While it’s been a focus for Cuomo, it is not an issue for most New Yorkers’ own wallets. Most New Yorkers will get a federal tax cut and the majority of New Yorkers will take the higher standard deduction that is coming rather than itemizing their taxes.
“They don’t need this,’’ Pokalsky said of most New Yorkers and the payroll tax idea being explored by Cuomo.
“The (Cuomo) administration has said its intent is to protect New York State from the effects of federal tax reform. Our initial concern is can you do that without a tax shift and … can this be done dealing with all the complexities (of the state tax code)? And, is this the best approach?’’ Pokalsky added.
Cuomo faces a hard sell with employers. Critics say he is ignoring the reality of why some New Yorkers are getting hit by the change in state and local tax deductions: The state’s tax levels soar above the national average.
Cuomo should spend his time addressing why New York spends so much compared with other states on things like Medicaid and public schools, said Michael Durant, state director of the National Federation of Independent Business.
“I’m sure folks in D.C. are looking at the governor saying, ‘Don’t cry poor to us when you’re taxing at such a high level and giving away things for free.’ New York should do a self-evaluation,’’ Durant said, referring to the high per-pupil spending levels in New York schools as well as the new free tuition program for some college students.
“The governor is talking about how this is pillaging New York, yet the vast majority is going to receive a tax cut and the vast majority of small businesses are going to receive a nice tax cut … If anything is done it should be to right-size our state spending,’’ Durant added.
People are using everything from “interesting” to “illegal” and “unworkable” to describe Cuomo’s still-in-the-works plan. Unknown to most, said fiscal watchdog Carol Kellerman: “whether it’s doable and whether it solves the problem entirely.’’
Kellerman, president of the Citizens Budget Commission, a nonpartisan group that monitors the state’s finances, said it’s uncertain how the payroll idea would work with freelancers and private contractors, as well as how it would treat investment income and capital gains. She noted others have raised questions about how companies would be able to lower the pay of minimum wage workers if wages are to fall to finance the initiative.
“It’s an intriguing idea,’’ said Kellerman, whose group has put together a panel of experts to offer input to the state as it works on a plan. “But we don’t know how employers are going to react to it, either. Will they say it’s double taxation or that a new payroll tax system is burdensome?’’