Proposal would eliminate the state income tax on wage earners, to compensate for loss of deductions
New York state would end income taxes on wage earners and make up the revenue with an employer payroll tax that's federally deductible as part of a restructuring plan that Governor Andrew Cuomo is recommending to mitigate harmful effects of the new U.S. tax code.
The new federal law limits deductions for individuals' state and local taxes – raising levies 25 % on all New Yorkers, no matter where they live, Cuomo said Tuesday. The federal changes could push residents and businesses out of state, the Democratic governor said as he presented a budget for the next fiscal year.
"We're doing everything we can to thwart the effects of the federal plan," Cuomo said. "This is going to be the most difficult challenge that we've had to take on because it's the most complicated, but I have no doubt that this is the fight of New York's future."
Earlier this month, Cuomo said his administration would file a lawsuit seeking to repeal the new federal tax law, arguing that it discriminates against states with high local and state taxes. In his budget speech, Cuomo for the first time fleshed out his plan to further reduce the impact of the federal law by changing the way the state taxes wage earners' income.
In the tax-overhaul legislation that President Donald Trump signed last month, the Republican-controlled Congress cut income-tax rates on businesses and individuals across the board. But it also limited the deductions that individuals can take for state and local taxes – including income and property levies – to $10,000.
That so-called SALT provision is widely viewed as an attack on Democratic-leaning states, which tend to have higher taxes. On Tuesday, Cuomo called the SALT cap "an economic missile" aimed at New York, which he said pays $48 billion more to the federal government than it gets back each year. The changes will add $14 billion more to that tally this year, Cuomo said.
"It targets New York with a penalty," he said. Overall, he said 12 states would be targeted by limiting the SALT deductions to help pay for other cuts. "Coincidentally, they all happen to be Democratic."
In response, Cuomo said his proposal, the "New York State Taxpayer Protection Act," would eliminate the state income tax on wage earners. Instead, the state would levy a wage tax on the employer. By doing so, the tax burden would shift from workers – who face new limits on their ability to deduct state income taxes – to employers, who could still take full deductions for such payroll taxes. The legislation would spell out which kinds of companies would be eligible for this treatment.
"It may actually reduce the liability because it may bring the worker down to a lower income bracket," Cuomo said.
The plan would apply only to wage earners. For other sources of income – including investment gains – the state would continue to run its personal income tax system, Cuomo said. The state Department of Taxation will spell out more details Wednesday, he said.
Cuomo also said he intends to create state charitable funds for education and health care, which would allow individuals to get state tax credits for their donations. This would mitigate the impact of the federal tax plan on high-income earners, he said. California and New Jersey officials are considering similar proposals.
The governor also proposed deferring tax credits for companies that receive $2 million or more in credits for one year, which would raise $300 million in state revenue, he said. The federal tax changes – which cut the corporate tax rate to 21% from 35% – will more than make up for that change, he said.
"They weren't expecting the tax cut; they got the tax cut," Cuomo said. "It'll more than offset the deferral of our credits."
