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New York state will challenge the new federal tax law as unconstitutional “double taxation,” Gov. Andrew M. Cuomo (D) confirmed in his State of the State speech to the Legislature Jan. 3.
The law’s limitation on the state and local tax deduction violates the equal protection and state’s rights provisions of the Constitution, Cuomo said. Several leading tax attorneys have told Bloomberg Tax, however, that neither the U.S. Constitution nor Supreme Court case law prevents Congress from acting as it did to limit the deduction.
The governor also said he is looking at “a major shift” in the state’s tax law to reduce New York’s reliance on the personal income tax. Among the options he is looking at: creating a statewide payroll tax system, creating new charitable organizations, and eliminating the carried interest tax break used by private equity.
Cuomo has said he will announce the details of the tax overhaul when he presents his 2018-19 budget.
“It’s not going to be easy,” Cuomo said. “It is going to be complicated. We have no choice. If we do not fix this problem, it is a question of the State of New York’s economic viability long term.”
The federal tax law ( Pub. L. No. 115-97), signed Dec. 22 by President Donald Trump, allows taxpayers to deduct up to $10,000 of property taxes and state and local income or sales taxes. There was previously no limit on the amount of state and local taxes that could be deducted.
Jennifer Abelaj, senior counsel in the trusts and estates practice group at Davidoff Hutcher & Citron LLP, told Bloomberg Tax in an email that Cuomo’s plan is “an aggressive attempt to attack the tax bill directly and indirectly.”
“A constitutional challenge to the tax bill would certainly require significant state resources and may take an extended period of time to be resolved,” she told Bloomberg Tax in an email. “While any constitutional challenge is pending, the governor’s three-part strategy would provide more immediate and timely relief to New Yorkers by taking advantage of the tax-reduction provisions currently in the revised code.”
Cuomo said he would launch his own version of a “repeal-and-replace” campaign.
The Democratic speaker of the New York Assembly and the Republican majority leader of the state Senate have also indicated support for mitigating the impact of the federal tax bill, but neither has announced any specific plans. New York is among many predominantly Democratic states, including New Jersey, California and Washington D.C., that have already announced or promised formal reactions to the new law.
One of the major alternatives being floated is the idea of a payroll tax system replacing a personal income tax system. In such a system, the employer, who is responsible for paying the tax, would receive a business deduction for such payments, and the employee, who is now paying state taxes in the form of payroll taxes, will no longer have to apply income taxes toward the state-and-local tax (SALT) deduction.
That system would benefit the employer and the employee, Abelaj said.
The idea of replacing all or part of the state personal income tax with a payroll tax, “partially subsidized by the federal government via business tax deductions, might sound plausible or even appealing on the surface to politicians worried about the impact on their revenue cash cows,” E.J. McMahon, research director of the conservative-leaning Empire Center for Public Policy, said on the center’s blog.
“But on closer inspection, even taken on its own terms, the payroll tax idea is not nearly as simple as it sounds. In fact, any attempt to broadly displace the PIT with a payroll tax would be fraught with mind-bending complications and virtually impossible to implement,” he said.
“In the final analysis, any attempt by New York’s state leaders to adjust for or offset the loss of [the state-and-local deduction] through the creation of new, supposedly ‘deductible’ taxes is unlikely to be worth the effort and distraction,” according to McMahon.
Abelaj said one of Cuomo’s other ideas would create state not-for-profit entities and “allow residents to pay their ‘owed’ state income taxes, likely the amount in excess of $10,000, to an in-state authorized not-for-profit organization,” she said. “This would benefit the not-for-profit entity while allowing the taxpayer to receive a federal charitable deduction, which is increased to 60 percent of AGI from previously 50 percent of AGI. In this case, the taxpayer would obtain the benefit of the SALT deduction, plus the additional deduction of the charitable contribution.”
Leah Robinson, an attorney at Mayer Brown LLP, told Bloomberg Tax “the governor’s plan to help his citizens find relief from the new federal state and local tax deduction limitation is encouraging.”
“The ideas are creative and exciting and—as a state tax wonk—I’m absolutely intrigued and cannot wait to see where these initiatives go,” she said in an email.
Jennifer S. White, an attorney with Reed Smith LLP, said Cuomo has shown “a real initiative to try and do something to help New Yorkers recover from the loss of the state and local tax deduction.”
“I think that that’s a good thing,” she said. “What exactly it looks like, I think it’s a little soon.”
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