Judge: MTA's payroll tax unconstitutional

County Executive Edward Mangano seeks to repeal the payroll tax after the transportation agency said it would withdraw financial support for Long Island Bus. Videojournalist: Howard Schnapp (July 29, 2010)

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A state Supreme Court justice Wednesday declared the MTA's payroll tax unconstitutional, ruling in favor of Nassau and Suffolk counties and several other municipalities that sought to have the controversial tax struck down.

The Metropolitan Transportation Authority, which counts on the $1.2 billion generated annually by the tax, said it will appeal the ruling and noted that similar suits have been thrown out when challenged.

Nassau filed the suit in 2010 while in the midst of a funding battle with the MTA over the county's bus system. The county argued that the payroll mobility tax, which charges employers in the MTA region 34 cents for every $100 of payroll, violated the state constitution because it changed the tax policies of individual municipalities for a purpose that did not benefit the entire state. The tax, created in 2009, was reduced last year for small businesses.

To impose the tax, the state had to have received home rule messages from the municipalities or pass the tax law with a two-thirds vote in both houses of the State Legislature, the suit argued. State Supreme Court Justice R. Bruce Cozzens Jr. agreed.

"The MTA payroll tax is a special law, which does not serve a substantial state interest," Cozzens Jr. wrote in his decision. Because the state did not seek a home rule message or the two-thirds votes, "this was passed unconstitutionally."

MTA spokesman Adam Lisberg said the agency will "vigorously appeal" the ruling. Agency officials said they expect the state will continue to collect the tax pending their appeal.

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"We believe this opinion will be overturned, since four prior challenges to the constitutionality of the law making the same argument have been dismissed," Lisberg said. Those dismissed cases included suits filed by the towns of Huntington, Brookhaven, Southold and Southampton, MTA officials said.

Nassau County Executive Edward Mangano called the ruling "a great victory for every taxpayer," adding, "This success sends a strong message to job creators that we will not allow the MTA to stifle economic growth and chase jobs out of our state. This is a historic victory for tax relief and tax reform. I am proud that Nassau led counties and villages around this state to a tax relief victory."

The tax was created as part of a $2.3-billion state bailout of the Metropolitan Transportation Authority as it faced a record deficit.

Nassau has paid $9.9 million in MTA payroll taxes since 2009, while county business owners have paid roughly $80 million per year, Mangano said. County Attorney John Ciampoli said Nassau's payments "were made under protest."

The county plans to seek retroactive relief for funds it has paid since the law was enacted. It is unclear if the county will be able to seek similar relief on behalf of county businesses, officials said.

Suffolk County Executive Steve Bellone called the decision "a big victory for Suffolk County taxpayers, many of whom get little to no service from the MTA." Suffolk pays about $3.5 million annually as a result of the payroll tax, but, pending appeals, Bellone said he won't immediately eliminate the cost from his 2013 budget. "We just hope it sticks," he said.

Gov. Andrew M. Cuomo's office declined to comment.

Scott Reif, spokesman for Senate Majority Leader Dean Skelos (R-Rockville Centre), said the tax was unfair and onerous and "never should have been implemented in the first place."

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Republican state lawmakers have repeatedly sought to repeal the tax, arguing it unfairly burdened business owners in suburban New York who didn't benefit from public transportation as much as those in the city.

Michael Whyland, a spokesman for Assembly Speaker Sheldon Silver (D-Manhattan), said, "We are examining the decision and considering its consequences and impact."

Ryan Lynch, associate director of the Tri-State Transportation Campaign, a transit advocacy group that has supported the tax, cautioned lawmakers against celebrating its potential repeal.

"If this ruling is held up, what this essentially does is blow a billion dollar hole in the MTA budget," he said. "And it's those elected officials that have been fighting so fiercely over this payroll tax that are going to have to find a different way to fund the MTA."

With Paul LaRocco

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