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Budget director outlines options for New Yorkers losing SALT deductions

Feb 12, 2018

Gov. Andrew Cuomo's budget director, Robert Mujica, outlines plans to offer a payroll tax credit and charitable fund to mitigate the effects of the partial loss of the SALT deduction in the federal tax overhaul.

Gov. Andrew Cuomo’s budget director said 30-day amendments to the governor’s spending plan, which is due out later this week, will include an overhaul of the 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.

Robert Mujica said the governor will propose a payroll tax credit program that businesses could use instead of the state and local income tax system.

He said for workers who have to pay more in taxes under the federal overhaul, this could help make them whole. 

The federal tax plan, which was approved in December, caps taxpayers’ deductions on their property, state and local income taxes at $10,000.

Some businesses have expressed reservations about the idea. But Mujica said 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 also could choose to include workers who make less than $40,000 a year.

Mujica said if a worker were to get a small raise each of the years, then by the time the payroll tax option is fully phased in, they might be earning the same amount of gross pay as when the program started, so they 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 said things could get complicated under the plan. He said employers will have to “carefully consider” the shift of tax liability and calculate whether there are administrative costs for businesses if they choose the payroll tax credit option.

“It could be a real challenging thing to do in the real world,” Pokalsky said.

Cuomo also will 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 also would help local governments and school districts set up their own charitable funds.

Pokalsky likes that option better. He said 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. 

Mujica said 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 do,” he said. 

Pokalsky said there’s another option that Cuomo and his budget makers could take: reduce state spending, which would lead to lower taxes. He credits the governor for holding the line on spending increases to about 2 percent per year, but he said that’s not really enough.

“Can the state continue to afford the spending trajectory that it’s on?” he asked.

Mujica said the 30-day amendments also will 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 said the plan, in its entirety, would not cost the state or taxpayers any more money.