As Federal Government Targets States by Nearly Eliminating the SALT Deduction, New York Takes Action
30-Day Amendments Will Include Proposals for an Optional Payroll-Tax System, New Funds for Charitable Donations, and Legislation to De-Couple from the Federal Tax Code
Governor Andrew M. Cuomo today announced that the 30-day amendments to the Executive Budget will include legislation allowing employers to opt-in to a new payroll tax system to protect their employees from Federal tax increases. In addition, legislation will create two new funds to accept donations to fund health care and education programs, allowing taxpayers who itemize their deductions to deduct those donations from their federal taxes. Finally, budget amendments will include provisions to decouple the state tax code from the Federal tax code so that State taxpayers do not see increased state taxes because of Federal tax increases.
“While the federal government takes direct aim at the economic heart of New York, with this new legislation we are taking action to protect hardworking New Yorkers from this attack from Washington,” Governor Cuomo said. “With these reforms to our tax code, we are doing everything we can to protect the rights and wallets of families across New York.”
“These amendments to the Executive Budget will protect New York’s taxpayers, our State Budget, and our economic competitiveness,” State Budget Director Robert F. Mujica, Jr. said. “New York has 52 counties with average SALT above $10,000, the largest percentage of taxpayers getting a tax increase, and this law makes it more expensive to live here relative to other states.”
Acting Commissioner of Taxation and Finance Nonie Manion said, “We collaborated with our agency’s experts and industry stakeholders to develop options to limit the damage from the federal tax changes that unfairly target New York State and its citizens. These amendments will restore fairness for taxpayers while also maintaining the state’s competitiveness.”
The legislation to be advanced with the 30-day amendments will build on the preliminary report released in January by the Department of Taxation and Finance, which outlines options for state tax reform designed to mitigate the adverse impact of the federal legislation on our economy and on New Yorkers. After further study and extensive consultation with experts from state and local government, academia, and the private sector, the proposed reforms were found to be viable options for protecting New Yorkers.
Legislation to be included with 30-day amendments will protect taxpayers by:
- Creating a new Employer Compensation Expense Tax: While Federal tax reform eliminated full State and local tax deductibility for individuals, businesses were spared from these limitations. Under 30-day legislation, to protect their employees from the tax increases associated with the limitations on SALT deductibility, employers would be able to opt-in to a new ECET system. Employers that opt-in would be subject to a five percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on January 1, 2019. The progressive personal income tax system would remain in place, and a new tax credit corresponding in value to the ECET would cut the personal income tax on wages and ensure that State filers subject to the ECET would not experience a decline in take-home pay. Overall, the proposal is designed to be revenue neutral for the state while giving employers the opportunity to reduce their employees’ federal taxes.
Under the legislation, the deadline for the first annual election for employers to opt-in to this alternative system will be on October 1, 2018, for the 2019 tax year. The benefits associated with the election will include not only income tax relief for affected employees but also a new tax credit available to employers to offset administrative costs. For those who opt-in, the new payroll tax on wages over $40,000 would be phased in over three years: 1.5 percent in first year, 3 percent in second year, 5 percent in third year.
- Charitable Contributions to Benefit New Yorkers: The legislation creates two new state-operated Charitable Contribution Funds to accept donations for the purposes of improving health care and education in New York. Taxpayers who itemize deductions could claim these charitable contributions as deductions on their Federal and State tax returns. Any taxpayer making a donation could also claim a State tax credit equal to 85 percent of the donation amount for the tax year after the donation is made. In addition, the amendment authorizes school districts and other local governments to create charitable funds for education and health care. Donations to these funds would provide a reduction in local property tax bills (via a local credit) equal to a percentage of the donation.
- Decoupling from federal tax code: The state tax code is closely aligned with the Federal tax code. This legislation decouples the state tax code from the federal tax code, where necessary, to avoid more than $1.5 billion in State tax increases brought solely by increases in Federal taxes. Federal tax reform capped the itemized deduction for State and local taxes (SALT) at $10,000. The Governor proposes to decouple from this cap so New York taxpayers are not subjected to a $441 million State tax increase from the flow through of this cap to State income tax returns. The legislation also decouples from other Federal deduction changes, saving State taxpayers $269 million annually beginning in FY 2020. The 30-day amendments will also maintain the State standard deduction for single filers. Without this change, single filers would not be able to take the standard deduction on their State return, and New York taxpayers would have been subjected to an $840 million annual State tax increase beginning in FY 2020.
Last month, the Governor moved forward on his multi-pronged effort to fight the federal tax assault and announced, along with the Governors of New Jersey and Connecticut, a coalition to sue the federal government. The new law effectively preempts the states’ ability to govern by reducing the ability to provide for their own citizens and unfairly targets New York and similarly situated states in violation of the Constitution.
The new federal law disproportionally and adversely impacts New York State, which already sends $48 billion more each year to Washington than it receives in federal dollars. According to a recent report released by the State Department of Tax and Finance, the elimination of full SALT deductibility alone will cost New York an additional $14.3 billion.