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Gov. Andrew M. Cuomo (D) released the first details of his plan to mitigate the impact of the federal limit on state and local tax deductions Feb. 12, proposing a 5 percent payroll tax and the creation of two charitable funds.
He also called for decoupling the personal income tax code from the federal code, preventing the state from reaping a windfall of $1.5 billion.
State Budget Director Robert F. Mujica told reporters Feb. 12 that state officials are also working on creating an unincorporated business tax, but the details won’t be ready soon because its “enormously complicated.”
More details on Cuomo’s plan will be announced Feb. 15, when the governor releases what’s known as 30-day amendments to his proposed budget. Mujica said the state will also be “refining the proposal, if necessary” over the next eight weeks “to make it as attractive for as many employers as possible.”
The plan is part of a three-pronged strategy by Cuomo to mitigate the increased state and local tax burdens under the 2017 federal tax act ( Pub. L. No. 115-97). Under the new law, taxpayers who itemize deductions on their federal return may deduct up to $10,000 in state sales, individual income, and property taxes. Previously the SALT deduction was unlimited.
Cuomo is also planning to sue the federal government over the cap along with other governors, and has launched a public relations campaign to “repeal and replace” the cap.
The payroll tax will be voluntary for employers and phased in over three years beginning in the 2019 tax year. The plan will be revenue neutral and won’t raise taxes on either employers or employees, according to Mujica.
Mujica said the new payroll tax is phased in so that employees will not take a pay cut. Instead, the tax is expected to effectively offset expected future growth in wages. Employers would pay a 1.5 percent payroll tax in the first year, 3 percent in the second year, and 5 percent in the third and final year. They will have until Oct. 1 to opt in for the 2019 tax year.
Charitable contribution funds would be created to provide funding for the two most expensive parts of the state budget: education and health care. Taxpayers could claim a new tax credit equal to 85 percent of their contributions to the funds. School districts and local governments would also have the opportunity to create their own charitable funds.
Treasury Secretary Steven Mnuchin, during a Jan. 12 talk in Washington, threatened to target tax audits at residents of states that allow deductions for charitable donations to state charities that provide funding for public services. In addition, IRS Publication 526 says that taxpayers can’t deduct as a charitable contribution any payment for which they receive a benefit in return.
“I don’t underestimate what they might want to do,” Mujica said, referring to the IRS. “We think that we’re living within the structure of the law.”
The 30-day amendments normally give a governor the chance to clean up budget language and make relatively small changes to the proposed budget. This year, however, the 30 days has given the state additional time to analyze the impact of the federal tax law, which President Donald Trump signed Dec. 22, less than a month before Cuomo released his FY 2019 budget.
The next step for the plan is to garner the support of the Legislature, which is holding hearings on the governor’s budget. The state’s fiscal year begins April 1. The state Senate has already approved a bill ( S. 6974) that would resolve the conformity issues by coupling the state tax code to the federal code prior to enactment of the new federal law. The measure, which passed unanimously, is pending in the Assembly Ways and Means Committee.
“The governor’s 30-day amendments and the debate and discussion centered around how to react to the recent federal tax changes make one thing very clear: This year’s state budget must prioritize making New York more affordable for taxpayers and their families,” Senate Majority Leader John J. Flanagan (R) said in a statement.
Heather C. Briccetti, president and chief executive officer of the Business Council of New York State, said “employers will have to carefully consider the shift of tax liability and administrative costs” when considering whether or not to opt into the payroll tax. “The creation of a charitable contribution mechanism is more palatable to the state’s business community, but its value will depend on IRS deductibility,” she said in a statement.
Briccetti also urged the governor to decouple provisions of state business taxes that could negatively impact companies, as a result of the federal tax law.
In addition to the SALT provisions, the 30-day amendments would decouple the state’s personal income tax code from the federal code, as a way to prevent the state from reaping a $1.5 billion windfall from the federal tax law.
It would allow personal income taxpayers to itemize on their state return, even if they take the standard deduction on their federal return. State itemized deductions would also be decoupled from the new limits in the federal code, saving New York taxpayers $269 million, according to Mujica.
In addition, some 5.2 million single filers would be prevented from taking an $840 million hit on their state tax liability. New York law allows single filers to take the standard deduction only if they aren’t married, the head of a household, nor an individual whose federal exemption amount is zero. The elimination of the federal personal exemption, therefore, effectively barred these taxpayers from taking the state’s standard deduction.
The state would also decouple from the $10,000 SALT deduction cap at the federal level, so taxpayers can deduct the full amount of local taxes at the state level. Without the change, taxpayers would lose an estimated $441 million, according to Mujica.
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