Stung by the repeal of unlimited state and local tax (SALT) deductions on federal income taxes, and concerned by the implications for high-tax New York, Gov. Cuomo this week pledged “dramatic action to save ourselves and preserve our state’s economy.”
But in his State of the State Address, Cuomo didn’t announce anything truly dramatic on the fiscal front, like a commitment to accelerate already planned state tax cuts by reducing government spending.
Instead, the governor said he’d explore the feasiblity of “a major shift” of New York’s state tax burden from individuals (who will be losing federal deductions) to businesses (which will be keeping them), via a new statewide payroll tax on employers.
The idea might sound plausible on the surface. But on closer inspection, replacing even part of New York’s personal income tax (PIT) with a payroll tax would be fraught with mind-bending complications — and not very feasible at all.
For one thing, while payroll taxes are generally imposed at a flat rate, New York’s income tax is progressive, slapping higher rates on higher incomes, and different rates on similar incomes based on martial status and household size.
One third of taxable personal income, and nearly half of the $48 billion in revenue the PIT will raise this year, originates with non-payroll sources, including capital gains and dividends. Unless that slice of the PIT is preserved, a payroll-tax rate would have to be much higher than most New Yorkers now pay.
In addition, 1.3 million of the 9.1 million people working in New York are employed by government agencies, for which deductibility is not an issue since agencies pay no income taxes. Nearly a million more work in the largely nonprofit (and also corporate tax-exempt) private health care and higher education sectors.
Last but not least, to avoid simply raising taxes — and thus costs — on employers, a payroll tax would require workers to accept at least a small cut in wages, commensurate with the current state PIT bite. That’s a dead end right there.
In his speech, Cuomo also floated the idea of creating what would amount to a nonprofit charitable front for state government, which could accept fully tax-deductible contributions offset by state tax credits. But the Internal Revenue Service would almost surely reject this as a state-sponsored tax-avoidance scam.
Magical thinking about maneuvers to preserve federal SALT subsidies ultimately is a distraction from the core challenge created by the federal law: a substantial increase in New York’s net tax, as compared to lower-tax states.
As the governor himself put it in his speech: “This could cause people to leave the state of New York. And it could reduce our ability to attract business.”
Yet, in almost the same breath, Cuomo suggested he’s willing to use the state tax rewrites necessitated by federal tax reform to raise some taxes higher.
First, almost offhandedly, the governor said he would be “addressing the Wall Street giveaway called the carried-interest loophole, which is another device to give away revenue to people who don’t need it.”
The “loophole” in question is a federal tax preference for a type of investment income, collected mainly by partners in private-equity funds, which survived in the federal tax-reform bill, despite President Trump’s promise to end it. But there’s no such preference in New York, which treats all types of income the same.
Even though it’s strictly a federal issue, a proposal for New York and other states to collectively impose an added, punitive tax on carried-interest income has been promoted by New York teachers unions as a way of stigmatizing Wall Street investment bankers who are also major backers of charter schools.
More ominously, the governor wrapped up the tax-reform section of his State of the State with the blanket declaration that “we must not allow big corporations to enjoy a windfall at the expense of our middle class and our working families.”
In other words, Cuomo is willing to raise state taxes on the biggest beneficiaries of the reduction in federal corporate rates.
There are a lot of ways to sum all this up, but “preserving our state’s economy” is not one of them.
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