ALBANY — The state tax department has outlined for Gov. Andrew M. Cuomo a series of possible options that New York State could take with its tax code to try to circumvent provisions in the new federal tax law that hit some higher income residents with new restrictions on state and local tax deductions.
The plans target possible major changes to the state’s system of collecting income taxes.
The plan by the agency — important because it's a Cuomo-run department that oversees tax laws — suggests that state and local governments could create new charities to accept donations for government services. That could give those who give to charities a break on their state income taxes and additional federal deductions.
A system could be created by localities to collect donations by taxpayers as an end-run means to lower property tax obligations.
Without selecting a specific plan he will advance from the menu given him by tax officials, Cuomo indicated Wednesday he will be moving ahead to address what he has said is a federal assault on New York.
Cuomo called his tax agency’s list of ideas a “blueprint” with which he will work with legislators and others to come up with a final way to circumvent parts of the new federal tax law. The effort is expected to be a part of the state budget due by March 31.
“I will not stand by as partisan politics in Washington seeks to threaten the people of this state,’’ Cuomo said.
Most New Yorkers will be getting a tax cut under the new law. Cuomo said he fears that those getting hit with higher taxes will move from New York to lower tax states.
Critics have said Cuomo should focus more on reducing taxes and spending instead of finding ways to try to end-run Washington.
The plans all seek to benefit mostly higher income taxpayers — especially those in relatively higher property tax areas downstate — who under the new law will see their ability to deduct state and local tax payments capped at $10,000.
The end-runs being proposed in Albany would affect taxpayers who itemize on their federal tax forms, which last year amounted to about one-third of New York's tax filers.
A day after Cuomo indicated his eagerness to try an end-run around the federal law — one he and other governors in high-tax states have said targets Democratic states — his tax agency complied with the release of a 33-page report listing several possible tax code changes.
The report shows that the ideas are as complex as the state’s tax code itself — and would all, critics said, invite some level of scrutiny from the Internal Revenue Service.
The most obvious winner if Albany decides on a major reworking of its tax code?
According to E.J. McMahon of the Empire Center, it will be tax accountants who will make a killing from clients trying to figure out the possible state tax changes.
Albany watchdog group Reclaim New York called the list of ideas an assault on taxpaying residents in New York.
Possible workarounds, tax officials said, include variations of several previously unveiled ideas, such the charitable donation plan. The tax agency did not suggest a specific level of state tax credits that taxpayers could get for the donations to these new government-run vehicles.
A bill sponsored by Assemblyman Robin Schimminger, a Kenmore Democrat, would give a dollar-for-dollar match in tax credits for donations made to the new charities.
The contributions would then also be deductible on federal taxes — assuming the IRS agreed, and President Trump and Congress do not act to halt the end-run of the new federal tax law that was passed in December.
Other high-tax states, like California and New Jersey, are pushing ahead with similar plans as the ones laid out by New York's tax agency. The report notes that localities could set up similar charities for taxpayers who want to donate to them as a way to reduce their property tax obligations.
The other major plan seeks to reduce New York’s reliance on state income taxes, which the report Wednesday said totaled $47.6 billion in the 2017 fiscal year.
The tax agency said one option is to create a new employer compensation expense tax on employee wages. Among the ideas already pushed are having employees take a base pay cut — while reducing their state income tax obligations so their take-home pay is unaffected.
Employers would then use the salary savings to make new compensation tax payments to Albany and be able to deduct those taxes on their federal filings.
Under that plan, the state income tax system would be replaced by the employer compensation tax. Or, the income tax system would remain and employees could get a new wage credit against their income tax liabilities. The tax agency, though, noted issues would need to be addressed, including devising a system that maintains New York’s progressive tax system that now taxes incomes at different rates based on income levels and filing status.
Another variation could see New York create a flat, across-the-board employer compensation tax, though the agency noted such an idea would have to be designed to avoid disrupting the effects of the current progressive income tax system.
The tax agency also said Cuomo could consider applying new employer compensation taxes at specific wages — such as those earning $200,000 or more.
Other ideas presented Wednesday included:
- Imposing a new surcharge on amounts employers pay in supplemental wages, such as bonuses and commissions. Such wages account for about 12 percent of total wages in New York.
- Creating a payroll tax system on employers as an opt-in model. Such an idea would lead to the formation of a whole new class of businesses in New York, the agency said, and employees would get state tax credits if they work in one of the firms that participate.
The agency noted a slew of issues for policymakers to consider.
They ranged from how to treat the nearly 20 percent of taxpayers whose employers don’t pay federal taxes — such as state and local agencies — and how to ensure that various kinds of other tax credit eligibility, such as child tax credits, don’t get wiped out by reductions in gross pay levels for employees.