The Cuomo administration has released a few more details of its plan to propose an optional payroll tax for New York employers as a way to preserve some of the state and local tax (SALT) deductions capped under the federal Tax Cuts and Jobs Act.

A press release from the governor’s office said the payroll tax would give businesses a way to “protect their employees from Federal tax increases.”

However, most New Yorkers don’t actually need the protection. They can look forward to federal tax cuts, not increases. So for them, the “Employer Compensation Expense Tax,” or ECET, as outlined today by Budget Director Robert Mujica and the state’s acting tax commissioner, sounds like a solution in search of problem.

Here’s how the plan is summarized in the press release from the governor’s office:

While Federal tax reform eliminated full State and local tax deductibility for individuals, businesses were spared from these limitations. Under 30-day legislation, to protect their employees from the tax increases associated with the limitations on SALT deductibility, employers would be able to opt-in to a new ECET system. Employers that opt-in would be subject to a five percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on January 1, 2019. The progressive personal income tax system would remain in place, and a new tax credit corresponding in value to the ECET would cut the personal income tax on wages and ensure that State filers subject to the ECET would not experience a decline in take-home pay. Overall, the proposal is designed to be revenue neutral for the state while giving employers the opportunity to reduce their employees’ federal taxes.

Under the legislation, the deadline for the first annual election for employers to opt-in to this alternative system will be on October 1, 2018, for the 2019 tax year. The benefits associated with the election will include not only income tax relief for affected employees but also a new tax credit available to employers to offset administrative costs. For those who opt-in, the new payroll tax on wages over $40,000 would be phased in over three years: 1.5 percent in first year, 3 percent in second year, 5 percent in third year.

That reference to “a decline in take-home pay” is a crucial, if buried, detail. Once you get past the question of why any employer would give this a second thought, the key potential sticking point will be the need to reduce the gross pay of employees in order to offset the cost of the payroll tax. Otherwise, it would be just a corporate tax hike.

Bottom line: the optional payroll tax for incorporated entities is most likely to appeal to a relatively small group of reliably profitable firms employing highly paid executives and professionals—people whose salaries and bonuses run well into six figures, especially if they live and work in the New York City region. That’s because high-earning downstate residents have lost the most in SALT deductions (although even that does not necessarily mean they’ll all be paying higher federal taxes).

Even within that group, the payroll tax option is something likely to be considered only by firms whose executives and staff can work out a mutually satisfactory arrangement to restructure their compensation in a way that combines gross pay cuts and shared net tax savings. Clever execs with smart tax advisors will squeeze the maximum deductibility value out of such an arrangement—but still, the company’s workers will never recover the full value of their lost SALT. After all, those with salaries north of $200,000 are losing most (or much) of a deduction that used to be worth between 33 percent and 39.6 percent of their total SALT payments, while the new, lower corporate tax rate equates to a deduction worth just 21 percent.

If it works for them, fine. As long as it’s an option, the new tax might help dull the effect of a federal change that, as Cuomo points out, was unfair to New York and politically motivated to boot.

But to understand why this exercise would be a waste of time for most companies and their employees, consider a worker named Mike Jones, earning a $60,000 salary working in the warehouse for ACME, Inc. Mike has three school-aged kids and files a joint return with his wife, who makes $15,000 working part time. On a gross income of $75,000, their total state PIT bill is $2,000, an effective rate of 2.7 percent. As it happens, under the new federal tax law, their federal tax bill is also going to go down in 2018 by about $2,000—a more than 100 percent cut, converting their current $1,781 liability into a $261 refund. Listening to Cuomo’s description of federal tax law and its impact on New York, you’d never guess such a thing was possible.

If ACME opts into the ECET, the company in the third year will pay a 5 percent payroll tax on $20,000 of Mike’s salary. To offset this, the company will cut Mike’s gross pay by $923.50, which is the employer’s cost after subtracting $76.50 in federal payroll taxes it will no longer owe on that $1,000. Note: Mike’s take-home pay is supposed to be preserved by a tax credit. However, sSuch credits usually are awarded based on annual PIT filings, which means Mike’s cash flow will be reduced by about $77 a month until he files his tax return. It seems unlikely he will be pleased by this, unless he gets a raise to make up for it. Mujica indicated the value of the tax credit would be factored into withholding rates. (The previous passage is edited from original version.)

What else is in it for Mike? Well, when you come right down to it, nothing—unless ACME shares with him some portion of the value to the company of the federal tax deduction for the payroll tax on his salary, which comes to $220. All this to “protect” Mike from a federal tax increase that isn’t even happening.

And what’s in it for ACME (which, remember, is already looking at a big federal corporate tax cut)? Well, if the company employs 20 people at the same $60,000 salary, the value of the tax deduction comes to $4,420. In the context of a payroll in the neighborhood of $1.5 million (including benefits), this is barely enough to pay the higher accounting and payroll management costs ACME will probably incur, although the governor’s press release also promises some sort of tax credit to help with that.

Loose ends

From the perspective of the state’s own tax base, which depends disproportionately on payments by income millionaires, the most significant group of New Yorkers still pining for some restoration of deductibility is comprised of partners in investment banks, law firms and other other pass-through entities whose owners presently lack a vehicle for deducting their own compensation on federal taxes. Cuomo officials suggest they are still working on a variation of the ECET proposal for such firms, possibly some version of an optional state unincorporated business tax (UBT) organization, which will necessarily be more complicated.

Meanwhile, the governor’s press release said he will also propose “two new state-operated Charitable Contribution Funds to accept donations for the purposes of improving health care and education in New York.” More:

Taxpayers who itemize deductions could claim these charitable contributions as deductions on their Federal and State tax returns. Any taxpayer making a donation could also claim a State tax credit equal to 85 percent of the donation amount for the tax year after the donation is made. In addition, the amendment authorizes school districts and other local governments to create charitable funds for education and health care. Donations to these funds would provide a reduction in local property tax bills (via a local credit) equal to a percentage of the donation.

The problem with this approach, as already noted by the Tax Foundation, is that it is likely to run afoul of Internal Revenue Service rules. That problem is explained in this article by a former New York State tax commisioner, Andrew Eristoff, who most recently served as New Jersey’s treasury secretary.

Finally, as expected, the governor’s staff today again indicated that Cuomo’s 30-day budget amendments will decouple New York from federal tax provisions that would otherwise restrict itemized deductions on state taxes, automatically increasing taxes on New Yorkers by $1.5 billion. Why this wasn’t proposed as part of the original Executive Budget remains a mystery.