The new federal tax bill signed into law last month will affect New York State particularly hard. Governor Cuomo and New York law makers are searching for ways to mitigate the effect on tax payers. The new tax bill places a cap on the state and local tax (SALT) deductions a person can take on their Federal taxes.
Before this bill, there was no cap on SALT deductions. No cap meant that high-tax states like New York were able to increase revenue with high property and income taxes without having taxpayers paying taxes to both the state and federal government.
In Governor Cuomo’s recent State of the State address he proposed a multi-faceted attack on the federal SALT cap. Cuomo proposes challenging the federal tax bill in court as unconstitutional because it violates states’ rights and the equal protection clause of the constitution. Other states are proposing a similar court challenge. However, legal experts do not expect these challenges to be successful.
Cuomo also proposes a “repeal-and-replace” campaign. Lastly, Cuomo proposes investigating the possibility of a major shift in New York State tax policy by developing a plan to restructure the current income and payroll tax system, in addition to creating new ways for charitable contributions to support public programs.
What does this mean to New Yorkers? Cuomo’s shift in the payroll tax system could mean essentially moving state income taxes to an employer-side payroll tax. A 7.65% payroll tax on both the employee and employer funds Medicare and Social Security. The amount of an employee’s salary taken by employer payroll taxes doesn’t count as taxable income. Shifting the current payroll tax system could allow the payroll tax to still be collected by the state but the amount would be exempt from an employee’s individual federal tax. Companies are still permitted to deduct payroll taxes, so the hope is that the cost to businesses would be limited.
Another idea proposed by lawmakers from high tax states like New York is to change income taxes to a “charitable donation state.” A donation would result in a dollar for dollar state tax credit, reducing the amount of income subject to federal tax by the charitable donation amount.
All of the ideas have their own unique hurdles and complications as the tax code is inextricably intertwined. However, it is clear that lawmakers in high tax states want to mitigate the SALT deduction cap.