Senate Republicans have issued a preliminary report laying out a series of state tax reform options and recommendations while also calling for a 2 percent cap on state spending to generate a “freedom fund” to pay for further tax reductions.
Like last week’s recommendations by Governor Cuomo’s Tax Reform and Fairness Commission, the Senate report contains some interesting ideas. Some are better than others–but at least one is downright awful (see below).
In recent years, often at the Senate GOP’s initiative, the state tax code has gotten increasingly cluttered up with loopholes, exemptions, exceptions, allowances and credits. To the extent that the Senate now seems to be backing away from that approach and embracing the principle of broad-based tax reform, the report could represent a real step forward.
Indeed, the Senate report notes that the 47 tax preferences in the corporate tax code are worth a total of over $1 billion. And it adds:
If these tax preferences were converted into rate reductions, the top rate of 7.1 percent could be lowered to 5.3 percent with zero revenue impact to the State. Preferences that are targeted at a narrow group of taxpayers have a tendency to distort the tax code. A large portion of taxpayers are paying a much higher effective tax rate than others solely due to the fact that they do not qualify for tax preferences.
As a starting point, the report recommends a “proportional” 25 percent reduction in those credits to fund broader relief. Like Cuomo’s tax reform commission in its report last week, while Senate Republicans are willing to recognize the unfairness and inefficiency of corporate tax preferences, they still aren’t ready to eliminate them.
Incredibly, just a few pages after criticizing such tax breaks and recommending that they be scaled back, the Senate report calls for the creation of an all new “Angel Credit” for investors in small businesses, and for expansion of the biggest New York tax giveaway of all, the Film Tax Credit, to cover up to 30 percent of the construction costs of film production studios. Huh?
The downright awful bit in the report is the suggestion that the next round of state tax cuts should include “temporary” relief from property taxes, possibly by reviving the STAR rebate that was discontinued after 2008. This, of course, wouldn’t be a tax cut but a tax shift.
Governor Cuomo’s tax commission has added its own fuel to this fire, suggesting that revenues from broadening the sales tax base might be spent on a bigger property tax circuit-breaker. Unfortunately, Cuomo hardly needs the encouragement; he’s already made it clear that his next big tax proposal call for some form of new state-subsidized property tax break, presumably on top of the $3.5 billion STAR program.
The Senate recommendations are laid out in a “preliminary” report of two committees — Finance, and Investigations and Government Operations — which held joint hearings on tax reform in late summer. In addition to the points described above, and to many small-bore, technical ideas, the report offers three potentially significant recommendations:
1. Conform New York’s Estate Tax, which currently hits gross estates of $1 million or more, to the federal Estate Tax threshold of gross estate values of $5 million or more.Since New York is now one of only 18 states that still have any estate tax, an obvious priority should be to eliminate the tax altogether. However, the Senate at least is pushing a bigger reduction than Cuomo’s reform commission. That panel recommended raising the cap to $3 million and resurrecting the defunct state gift tax, which would swap one anti-competitive tax for another.
2. Cap state spending at 2 percent. To be sure, Senate Republicans have non-seriously floated various spending caps since the 1980s. This time around, however, the GOP is seizing on Governor Cuomo’s own repeated suggestion that he could ultimately finance more than $2 billion a year in tax cuts by holding spending growth to 2 percent over the next few years. Effectively taking him up on the offer, the Senate would link a spending cap to a “Tax Freedom Fund” to pay for tax cuts. But note: the cuts are conditioned on a “surplus” that might not materialize.
3. Make permanent the state property tax cap, which was first enacted in 2011. Under current law, the tax cap (which does not apply to New York City) is supposed to remain in effect “at a minimum until and including” June 15, 2016. In reality, its fate is ultimately tied to the duration of state-mandated rent regulations in New York City, since the law also says the cap will remain in effect after June 15, 2016 “only so long as” the state-declared rent laws also are continued. Those laws are next due to expire in June 2015, a year ahead of the tax cap’s expiration date. If they are extended then, the tax cap (presumably) also will be automatically extended.
When Governor Cuomo agreed to this unusual provision in June 2011, his staff argued that it was tantamount to permanent enactment of the cap, since state Assembly Democrats would never agree to completely eliminate the city’s rent regulations. However, unless the 2016 sunset date is stricken from the law, it’s always possible that the Assembly will somehow find a way to kill the cap without allowing rent regulations to expire. But will the governor follow the Senate’s lead?
Other proposed new wrinkles
The Senate report suggests creating a “Simple Income Tax Calculation Method” that would give taxpayers the option of skipping the current four-page IT-201 long form and calculating tax in “four easy steps” based on federal adjusted gross income, minus any tax-exempt state or local pension, multiplied by an “effective tax rate” calculated by the state Department of Taxation and Finance. But without knowing the proposed rates, it’s impossible to say whether this might actually represent an appealing option for anyone.
The report also calls for the elimination of all state income taxation of private retirement income. Government pensions are already exempt from state income tax for New York, but the exemption for private retirement benefits is capped at $20,000 for singles and $40,000 for couples, and it applies only to periodic withdrawals and not lump sums. The Senate recommends raising those caps as a first step, setting complete elimination of the tax on all retirement benefits as a goal.
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