New York Governor Will Propose Decoupling State Income Tax Soon

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By Gerald B. Silverman

Gov. Andrew M. Cuomo (D) will propose measures shortly to decouple major provisions of the state’s personal income tax code from the federal code to prevent the state from reaping a $1.5 billion windfall from the new federal tax law.

Cuomo will propose eliminating a requirement that state taxpayers must take the state standard deduction—and not itemize—if they take the standard deduction on their federal income tax returns, New York Budget Director Robert F. Mujica Jr. said Feb. 8. He said 3.3 million New York taxpayers currently itemize.

Mujica, testifying before a hearing of the Legislature’s fiscal committees, said the governor will propose a measure that is substantially similar to a bill ( S. 6974) that passed the state Senate in January. The bill essentially linked the state tax code to the federal code prior to enactment of the federal tax law.

The decoupling provisions will be included in what’s known as the 30-day amendments to the governor’s budget, which are due by Feb. 15. The amendments will also include Cuomo’s larger plan to consider major shifts in the state’s tax system to mitigate the impact of the new federal cap on state and local tax deductions—Cuomo also has vowed to sue over that change in the 2017 tax act.

A report from the state Department of Taxation estimated that New York would reap a windfall of about $1.5 billion in personal income tax revenue as a result of the 2017 tax act ( Pub. L. No. 115-97), which President Donald Trump signed into law Dec. 22, and the coupling of the state and federal tax codes.

Wall Street Targeted

Meanwhile, a left-leaning coalition of unions and community groups urged lawmakers to enact some $16 billion in new taxes targeted at Wall Street, businesses, and the state’s wealthiest taxpayers.

The Strong Economy for All Coalition is calling for a $5.5 billion tax on the sale and transfer of stocks. The tax has actually been in place for many years, but the state effectively eliminated it in 1981 when it began rebating 100 percent of the tax back to brokers.

The coalition wants the tax imposed on high-frequency traders and high-dollar trades, with an exemption for small investors. Michael Kink, executive director of the coalition, said legislation would be introduced in the state Assembly this year.

The coalition is also calling for closing the carried interest loophole, $2.3 billion in higher personal income taxes for multi-millionaires, and a new tax on New York City luxury condominiums and development.

The new taxes will face a steep climb in the Legislature, particularly in the Republican-controlled Senate, where GOP lawmakers are generally opposed to raising taxes.

Protecting Businesses

Kenneth J. Pokalsky, vice president of the Business Council of New York State, urged lawmakers to both decouple the personal income tax code and take steps to ensure that businesses don’t pay additional corporate income taxes because of tax conformity issues.

“For example, under federal tax reform, certain economic development incentives provided by state and local governments will be considered contributions to capital and, therefore, recognized in a business’ gross income, adding to their federal tax liability,” Pokalsky said. “It would make no sense for New York to remain coupled to that federal change, as it would erode the value of state-awarded capital grants and similar economic development incentives.”

“Likewise, federal reform provides for bonus depreciation—the ability to write off 100 percent of the cost of capital expenses in the year they are incurred—but as a trade-off, puts a cap on the deductibility of interest expenses,” Pokalsky said. “New York is already decoupled from federal bonus depreciation, and while we support that favorable tax treatment of capital investments at the state level, if New York businesses are not allowed accelerated depreciation, they should not be subject to caps on the deductibility of interest costs related to capital investments.”

The Business Council is opposed to the creation of a new payroll tax to mitigate the impact of the new federal cap on the tate and local tax deduction, but it hasn’t taken a position on creation of a new charitable contribution mechanism, Pokalsky said.

Cuomo has called for creating an employer-based payroll tax to alleviate the impact of the new federal cap as well as 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.

To contact the reporter on this story: Gerald B. Silverman at gsilverman@bloomberglaw.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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