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Too Soon to Restructure Tax Code, New York Tax Agency Says

Posted on January 18, 2018 by Paige Jones

Transitioning to a payroll tax system would be one way New York state could mitigate the effects of the new federal tax law, but more analysis is needed before changes can be made, according to the state tax department.  

The New York State Department of Taxation and Finance outlined in a January 17 report the methods in which the state could restructure its tax code to reduce the effect of the new federal tax law, including reduced income taxes and implementation of a statewide employer compensation expense tax, the creation of a state income tax credit for specific charitable contributions, and implementation of an unincorporated business tax.

However, the report cautioned that “given the far-reaching nature of the law, New York State will need to undertake extensive analysis as it considers how best to respond to its consequential reforms, and the law’s impacts will need to be examined over time. In the face of this complex and consequential undertaking, any subsequent changes to the State tax code will be the result of an intensive and measured process.”

“With this blueprint as a foundation, we will work with experts, the Legislature, employers, taxpayers, and other stakeholders to develop and implement changes to the tax code that protect all New Yorkers," Gov. Andrew Cuomo (D) said in a January 17 statement on the report. "I will not stand by as partisan politics in Washington seeks to threaten the people of this state," he added.

The report was released a day after Cuomo unveiled his fiscal 2019 budget proposal, which called for marketplace sellers to collect sales tax on online sales, a surcharge on opioids, and an excise tax on vapor products to close the projected $4.4 billion budget gap.

“Depending on policy design, a new employer compensation expense tax system could be expected to generate billions of dollars annually in federal taxpayer savings while keeping state revenues constant,” but it would have to be progressive and maintain the tax base, the report said.

Other options the report described include:

  • creating a progressive employer compensation expense tax system;

  • adopting a flat-rate employer compensation expense tax to supplement the income tax system;

  • establishing an employer compensation expense tax that applies only above a wage threshold; and

  • implementing a tax surcharge on supplemental wages.

In the report, the tax department also said New York could expand the federal charitable deduction by establishing state-operated charitable funds that taxpayers could donate to in exchange for a state income tax credit or local property tax benefits.

For an unincorporated business tax, the state could impose a tax on the net income of passthrough entities and sole proprietor businesses, or could tax the gross receipts of passthrough entities, the report said.

The tax department also described the effects the new federal tax law would have on the areas in which New York conforms to the federal tax code, and outlined policy options to mitigate those changes. For example, the report said the state could decouple from the federal section 250 deductions on the "global intangible low-taxed income" of controlled foreign corporations to capture revenue. The state could also decouple from the $10,000 limit on the SALT deduction to restore deductibility at the state level.