One has to give Gov. Andrew Cuomo and his advisers credit. When it comes to the Republican tax bill, their motto is if at first you don’t succeed, try, try again.
The Empire Center broke the news this week that the state Department of Taxation and Finance is working on an unincorporated business tax that might allow partners at law firms and investment banks and similar high-paying places to get around the federal limitation on deducting state and local taxes.
Here’s a quick recap of the story.
Cuomo and other Democratic politicians have been railing against the Republican tax bill as a missile aimed at New York because it limits deductions for state and local taxes to $10,000. He’s exaggerating; most New Yorkers are getting a tax cut from the bill. But some high-income New Yorkers will be paying a lot more.
At the governor’s insistence, the Legislature included two workarounds in the state budget. The first sets up nonprofit funds for health care and education. New Yorkers can make charitable contributions to the funds that are deductible on their federal returns and count as a credit against state income taxes they owe. It’s a simple system but many believe the IRS will say it is illegal.
The second workaround allows companies to voluntarily agree to pay a payroll tax, which they could deduct against federal taxes, and in return their employees would receive a credit against their personal income taxes. This involved workers agreeing to reductions in their gross pay that would be offset by their paying less in tax, while employers would end up paying about the same. Tax lawyers say there is zero interest in the devilishly complicated scheme.
The latest brainstorm is to impose a 5% unincorporated business tax on partnership income that is subject to state income tax. The partnership could deduct the tax on their federal return. The partners would receive a 93% credit of their share of the tax against their state income tax, essentially offsetting the new 5% tax.
This UBT tax does provide relief to a group likely to face much higher federal taxes under the Republican plan. It too is very complicated. Here are three of the many problems. It needs to be coordinated with other states because many of their partnerships operate in several. Who is partner and who is not is also a big issue. And once passed, this new tax could become a vehicle to raise a lot of revenue.
What Cuomo fears is that very wealthy New Yorkers will flee the state and businesses in other states will outcompete New York for talent because of our increased tax burden relative to other states. Former state tax Commissioner James Wetzler says New York should wait to see whether millionaires migrate elsewhere before adopting untried ideas. If they do, then the state can take the right action to stop any flight. He’s probably right.
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