A report by Gov. Andrew Cuomo’s tax department lists ways that New Yorkers could get around the loss of some of their state and local tax deductions under the new law. But all of them come with complications.
When the federal tax overhaul law was signed by President Donald Trump in December, Americans lost their ability to deduct much of their state and local taxes from their federal tax forms. As Cuomo has said repeatedly, the loss of what are known as the SALT deductions harms taxpayers the most in relatively high-tax states like New York.
Cuomo said in his budget presentation on Tuesday that it’s “complicated” to change New York’s tax code to try to make up for the loss, but it has to be explored.
“Washington hit a button and launched an economic missile, and it said ‘New York’ on it, and it's heading our way,” Cuomo said. “You know what my recommendation is? Get out of the way before it lands. They want to shoot at our tax code the way it was? We change the tax code.”
The first option detailed in the report is to substitute charitable donations – which are still deductible from the federal income tax – for a portion of the state income tax. It proposes setting up several state-operated charitable funds, which would distribute the money to things like public education, health care and helping the homeless.
Local governments would be authorized to set up their own charitable funds.
Taxpayers would receive a credit for the donations and use them to offset their tax payments.
Cuomo admitted that a charitable donation system could not make up for all of the money a taxpayer might lose.
“The tax credit would probably not be dollar for dollar,” Cuomo said. “You wouldn’t actually get every dollar back on your taxes.”
Another proposal would switch all or part of the state income tax for a payroll tax. The worker’s paycheck would be reduced by an amount equal to what they owe on the state income tax. The employer would pay the tax instead, in the form of a payroll tax, which the company could then deduct from its annual taxes.
The report offers several scenarios on how to carry that out, including an option to limit the payroll tax option to the state’s highest earners – those making above $200,000 a year – who would be most affected by the loss of the SALT deductions. The report also suggests creating an entirely new tax classification for businesses, known as a class A business, with new rules to get around the loss of the deductions.
The governor’s budget director, Robert Mujica, said there could even be a “hybrid” of the two systems.
“This should be a benefit to taxpayers,” Mujica said. “That is the entire goal here.”
The report notes that the payroll tax could result in higher labor costs for some employers with unionized workers who have already agreed to wage levels in their contracts that can’t be adjusted downward, and with minimum wage laws.
Tim Kremer with the New York State School Boards Association said while he gives the governor credit for trying to remedy the situation, there could be all sorts of unforeseen consequences in both options.
“People who are employers, like I represent, and people who have to pass budgets, it causes a lot of confusion,” Kremer said.
He said school boards fear that the complications will lead taxpayers to vote “no” on school budgets. In recent years, virtually all school budgets in the state have been approved on the first try. He worries that trend could be reversed.
Finally, the report recommends a third option – a new statewide unincorporated business tax. That would apply to only certain types of pass-through businesses.
Even if New York implements one of the options to help mitigate the impact of the loss of the SALT deductions, there’s always the chance that Congress could simply pass new laws to prohibit the new arrangements.
Mujica said it’s still worth a try.
“We’re going to do whatever we can within the confines of that law to protect New Yorkers,” he said.
Mujica said his office and the state Legislature are on a tight deadline; they hope to have bills outlining the proposed tax restructuring changes ready in 30 days.