Cuomo Details Major Shift of N.Y. Tax Code to Avert Federal Act

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By Gerald B. Silverman

Gov. Andrew M. Cuomo (D) proposed a dramatic shift in New York’s tax code Jan. 16 by creating an employer-based payroll tax to alleviate the impact of the federal cap on the deduction for state and local taxes.

Cuomo, in his proposed budget for fiscal year 2019, also called for creating two charitable funds through which New Yorkers could pay for the state’s education and health care needs. The contributions, which would be federally deductible, would be eligible for a state tax credit.

He said the Department of Taxation and Finance would release a report Jan. 17 with details on the plan.

Cuomo said the steps were needed for the state to avoid a “missile” headed its way from the federal government in the form of the new federal tax law ( Pub. L. No. 115-97). New York would “get out of the way before it lands,” he said in his budget address.

Cuomo also called for a one-year deferral of tax credits for companies that have $2 million or more in credits, a step that would raise $300 million in revenue in FY 2019. In addition, Cuomo proposed a $170 tax surcharge on manufacturers of opioids and a $750 million charge to nonprofit health plans that convert, sell, or merge with for-profit plans.

Carried Interest

Cuomo said he would work with four neighboring states—Connecticut, Massachusetts, New Jersey, and Pennsylvania—to close the so-called carried interest loophole, which would raise $1.1 billion for the state.

Cuomo has been among the most outspoken opponents of the 2017 tax act from the state level, previously saying he would try to sue over the law’s new cap on the deductibility of state and local taxes on federal returns. The law, signed by President Donald Trump on Dec. 22, allows taxpayers who itemize to deduct their state sales, individual income, and property taxes up to $10,000 beginning this year. The deduction previously was unlimited.

Several other states, including California and New Jersey, have begun to explore end-runs of the tax law through converted charitable gifts or an employer-based payroll tax system.

Cuomo said the federal tax law would effectively raise taxes on New Yorkers by 25 percent, or $14 billion. The proposed payroll tax wouldn’t replace the state’s personal income tax system but would be implemented parallel to the current personal income tax. The payroll tax would only apply to wage earners.

Internet Taxes

For the third consecutive year, Cuomo proposed a new tax structure for online marketplaces operated by Amazon, eBay and others. Under current law, outside sellers are required to collect sales tax from New York residents if the seller is located in New York.

Cuomo would require the marketplace provider to collect the tax when they facilitate the sale to a New York resident, whether the seller is located in the state. Similar proposals by Cuomo died in the Legislature in 2016 and 2017.

The measure would raise $80 million in FY 2019 $159 million in FY 2020.

Cuomo also proposed a 14 percent surcharge on health insurance companies to recapture some of the savings these companies will receive from a reduction in their federal income tax. The surcharge will raise $140 million in FY 2019, Cuomo said.

Business Group Opposes

The payroll tax is opposed by the National Federation of Independent Business. Mike Durant, state director of the NFIB, said Cuomo’s plan is “complicated and potentially unworkable.” “New York’s lack of economic competitiveness and high tax status is solely the result of Albany’s tax and spend culture, not the recently enacted federal tax reform,” he said in a statement.

The Business Council of New York State is also opposed to the payroll tax.

Steve Malito, chairman of the New York State government relations practice group at Davidoff Hutcher & Citron LLP, said Cuomo’s “all-of-the-above approach to protecting New Yorkers from a massive tax hike is commendable, even as he recognizes the potential complications.”

“Converting the income tax to a payroll tax would require businesses to make a major adjustment and, for the cities of New York and Yonkers, would require a system for dealing with local income taxes,” he told Bloomberg Tax in an email. “Some sole proprietors and partnerships would be heavily incentivized to incorporate to achieve the tax savings. That said, the wage tax to payroll tax conversion could help some New Yorkers by lowering their income and shifting them to a lower tax bracket, at least on paper.”

He said the challenge for property taxes is more difficult, particularly if local governments are given the opportunity to create local charitable organizations. “While New York City surely has the resources to operate such charitable foundations, would a village or a town with only a small fraction of the population have that same ability? Would it be feasible and cost-effective for a municipal government to do that? Would there be other services that are shortchanged as a result?”

Potential Problems

Peter L. Faber, a partner at McDermott Will & Emery LLP, said all of Cuomo’s proposed workarounds present potential problems.

“A payroll tax would be complicated,” he told Bloomberg Tax in an email. “It assumes that employers would cut salaries to reflect the payroll taxes, which would be imposed in place of income taxes that are now paid by employees. How would this work in a collective bargaining situation where wages are prescribed by union agreements?”

He said “converting state income tax payments into charitable contributions would be hard to do because, to be deductible contributions, they would have to be voluntary.”

New York State Republican Party Chairman Edward Cox took sharp aim at Cuomo. “The truth is that more than 85 percent of New Yorkers and small businesses will get the benefit of a tax cut under the new federal tax plan,” he said in a statement.

“If the Governor actually cut state taxes instead of raising them, New York could experience the kind of economic resurgence happening at the national level,” Cox said.

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