ALBANY – Gov. Andrew M. Cuomo has proposed legislation that could create more than 2,000 new local government entities to accept charitable donations from residents who want to try to get around limits on state and local taxes in the new federal tax law.
New York’s 2,287 school districts, counties, towns, cities and villages each would be able to establish their own new charitable organizations to process donations from residents who in the 2018 tax year will be losing the ability to fully deduct their state income and local property taxes on their federal filings.
The concept is to tweak state law in order for residents to take advantage of the federal law that expands charitable donation deductions but restricts to $10,000 annually what residents can take in the way of federal deductions on their state and local income taxes. It remains highly uncertain whether the Internal Revenue Service will okay such a workaround scheme that New York and other high-tax states are considering.
The donation proposal seeks to create a system whereby taxpayers, if they want, can donate money to one of the new local, for instance, school-run charities. The charity would then, in turn, help fund the local school district's operations. The taxpayer would then see their property tax obligation lowered.
But Cuomo’s plan, unlike some ideas by lawmakers, is not a dollar-for-dollar match. Those giving to a school-based charity, for instance, would see their annual property tax liability drop by 95 percent, not the full 100 percent based on the donation.
That could mean that schools could end up bringing in more local revenues. Take, for example, a couple with a $10,000 property tax bill. Under the Cuomo plan, they could make a $10,000 donation to a new school-run charity. But only $9,500 of that could be taken as a credit against their school property tax obligation. That means they would still owe another $500 in property taxes, leaving the district with a total of $10,500 between the donation and the tax payment.
What that doesn’t factor in is the potential administrative headaches for districts in having to take on the running of a new charity and determining each year who gets what in the way of tax credits versus tax payments. Schools are also worried about the volatility that can come with any system of charitable contributions.
David Albert, a spokesman for the New York State School Boards Association, said the group is still studying the new Cuomo plan. “We neither support or oppose it,’’ he said.
“We do support the governor’s intention of trying to find a way to deal with the fact that we now have a cap on the state and local tax exemption,’’ Albert said.
The new budget amendments also call for creation of a new “Charitable Gifts Trust Fund,’’ which would be run by the state. Money donated to that fund could be used for various education and health care purposes. Taxpayers who give to those funds will get a credit – capped at 85 percent of the donation total – on their state income taxes.
The budget amendments portray the complexity of the idea: The Cuomo administration could make no estimate for future charitable donations to be made by New Yorkers under the state and local contribution systems it proposes.
Both plans were quietly unveiled late Thursday night by Cuomo – after weeks of openly discussing the need for New York to create an end-run around the new federal tax law because of the new restrictions on state and local tax deductions. The state tax fixes will almost exclusively benefit higher income earners who itemize and residents who live downstate with relatively higher annual property tax bills.
As expected, the new budget amendments also include a proposed shift – for the increasing minority of taxpayers who will still itemize under the new federal law – away from state income tax payments to an employer-paid payroll tax system.
The idea behind this is that employees would, in some cases, take a decrease in their gross salary but see a state income tax cut that would keep their take-home pay remain the same. Employers could use the payroll savings to subsidize the new payroll tax; employers would also be able to deduct those payroll taxes on their federal tax filings – assuming the federal government does not block such end-run ideas.
Critics have said the Cuomo ideas are needlessly complicated for a problem facing a minority of New Yorkers. A third of New Yorkers itemized their federal tax filings last year; the number is expected to sharply decline with the near doubling of the standard deduction level under the new federal law.
The Cuomo administration has expressed concerns that the federal law will push some higher income residents out of the state; the New York State budget relies heavily on personal income taxes from such wealthier filers to remain in balance. Cuomo also plans, with several other high-tax states, to sue the federal government, claiming the new law targets Democratic states with higher tax tabs to pay for more cuts in Republican states.
The payroll tax, like the charitable program idea, would be voluntary under the Cuomo plan. Companies joining the new payroll tax system would pay a 5 percent tax on payroll expenses that are over $40,000 per employee. The system phases in over three years.
There are a whole series of complexities surrounding the ideas, starting with a concept that workers won’t want to take a cut in their gross salary even if their take-home pay remains the same.
The new plan also offers a major bow to bondholders and Wall Street credit rating agencies, who might be worried that state bonds – with payments guaranteed by the state’s income tax revenues – could face future payment issues if Albany is to rely less on income tax collections. To allay those fears, Cuomo is proposing to double to 50 percent the level of personal income tax revenues received by Albany each year dedicated to paying off such bonds.
The budget amendments Cuomo proposed overnight were a striking departure from the budget process going back decades. Typically, the so-called “30-day amendments” that governors can, by law, make to their original budget submission amount to more technical kinds of changes. Sometimes, influential groups can successfully convince a governor in the amendment process to add or delete something proposed 30 days earlier in the main budget plan.
But Cuomo’s amendments offered a sweeping round of fiscal and policy ideas. Beyond the payroll tax and charitable donation programs, Cuomo offered up ideas to reduce traffic congestion in New York City, expand availability of flu vaccines for children, impose restrictions on sex offenders, provide funding for an early voting program, ban synthetic marijuana sales and target physicians who engage in medical misconduct.