Governor Andrew Cuomo’s budget director says 30-day amendments to the Democrat’s spending plan due out later this week will include an overhaul of New York state’s tax code. It will include plans to ease the effects of the loss of the state and local tax deductions in the new federal tax overhaul.
Budget director Robert Mujica says the governor will propose a payroll tax credit program that businesses could use instead of the state and local income tax system.
He says for workers who have to pay more in taxes under the new federal tax overhaul, this could help make them whole. The federal plan, approved in December, no longer allows state and local income tax deductions from federal tax forms, and limits property tax deductions to $10,000.
Some businesses have expressed reservations about the idea. But Mujica says no employer will be forced to make a switch.
“No business has to do it at all,” Mujica said. “It’s voluntary, which is a critical piece."
Under the plan, employees would technically earn less income in their gross pay. It would switch a significant part of their state income tax for a payroll tax credit. The worker’s paycheck would then be reduced by an amount nearly equal to what they owe on the state income tax. The employer would pay the tax instead, in the form of the payroll tax credit, which the company could then deduct from its annual taxes. That would leave the workers with the same amount in take-home pay.
The program would start in October, and be phased over three years, growing to a 5 percent payroll tax that employers would pay for all employees who make over $40,000. Businesses could also choose to include workers who make less than $40,000 a year, if they want to. Mujica says if a worker were to get a small raise each of the years, then by the time the pay roll tax option is fully phased in, they might be earning the same amount of gross pay as when the program started, so would not see a change in their paychecks. They would, however not be seeing an increase in their paychecks.
There’s been speculation that companies most interested in a payroll tax would be firms that employ high income earners from higher taxed areas of the state, like New York City and its surrounding suburbs.
Businesses that employ lower waged workers might find that their employees actually make out better under the federal tax plan, after they take the new and significantly larger standard deduction on their federal tax forms.
The state Business Council’s Ken Pokalsky says things could get complicated under the plan. He says employers will have to “carefully consider” the shift of tax liability and calculate whether there are administrative costs for businesses should they choose the payroll tax credit option.
“It could be a real challenging thing to do in the real world,” Pokalsky said.
Cuomo will also propose that two new charitable contribution funds be created, for health care and education. Taxpayers who itemize deductions could then claim the charitable contributions as deductions on their federal tax return. Under current IRS rules, people can donate to a school, or a hospital, and receive a credit on their taxes for a charitable donation. The state plan would allow a tax credit for up to 85 percent of the donation.
The state would also help local governments and school districts set up their own charitable funds.
Pokalsky likes that option better. He says it’s simpler than the payroll tax credit. But he worries that the IRS might change its rules and say the deductions are no longer permitted.
"If even the state passed it, I think they'd be hard-pressed to get taxpayers to make these contributions," said Pokalsy.
Mujica says there is legal precedent for continuing to allow the charitable deductions for health care and education, but he admits there is no way of predicting what the federal government might do.
“I don’t underestimate what they might want to do,” he said.
Pokalsky, with the Business Council, says there’s another option Cuomo and his budget makers could take, and that is to work to reduce state spending, which would lead to lower taxes. He credits the governor for holding the line on spending increases to around 2 percent per year, but he says that’s not really enough.
“Can the state continue to afford the spending trajectory that it’s on?” he asked.
Mujica says the 30-day amendments will also contain language to decouple New York state from the federal tax code. Without that change, some taxpayers would end up paying a total of $1.5 billion more in taxes to the state. The governor’s budget director says the plan, in its entirety, would not cost the state or taxpayers any more money.