ALBANY — Gov. Andrew M. Cuomo’s idea to shift some state and local tax payments owed by individuals to a payroll tax paid by employers so many New Yorkers don’t lose thousands of dollars under a new federal tax law is supported in concept by many tax policy experts. But others warn there are substantial, perhaps insurmountable, challenges to enacting it.
Cuomo’s gambit is a way to keep higher-income New Yorkers who pay high local property taxes from facing much higher federal taxes under a new tax law signed by President Donald Trump in December. The president contends the law will spur the economy with big tax breaks for corporations and the wealthy.
To help pay for those breaks, the new federal law caps the deductibility of state and local taxes for individuals at $10,000. Cuomo’s budget office estimates that the provision will hurt 1.7 million middle class to wealthy homeowners in New York who pay much more than $10,000 annually — 46 percent of all homeowners statewide itemize deductions — as well as reduce property values because of the eroded tax shelter of homeownership.
Fewer deductions means a higher federal tax bill — especially for Long Island, Westchester County and New York City residents, who have some of the nation’s highest property taxes.
Cuomo’s idea is to channel the amount a resident now pays in income tax to a payroll tax to avoid the deductibility cap.
Here, in theory, is how a state budget official and tax policy professors said it could work: An employee and an employer would have to agree to lower an employee’s annual wage by the amount that employee would normally pay in state income tax. For example, a $100,000 wage could be reduced by $6,000 to $94,000.
The employer would then, in effect, pay the employee’s state income tax payment through an equal amount of state payroll tax.
The employee would benefit from a lower annual taxable income — the $94,000 in the example — which will reduce the employee’s federal income tax and offset to some degree the amount that would be lost because of the cap on state and local tax deductions.
The company would still pay out a total of $100,000 — $94,000 to the employee and $6,000 in a new payroll tax. For the company, wage and payroll tax payments are deductible on federal tax returns and the goal of the Cuomo administration would be to make the company whole.
The state would still get its $6,000 in tax revenue.
Cuomo also is considering allowing individuals to pay some of their taxes as charitable donations to governments and schools. That would also be a complex maneuver and would require changes in the state tax code as well as local laws.
Along the same lines, Assemb. Robin Schimminger (D-Kenmore) is soon to introduce a bill that would effectively channel income tax payments to a state charitable fund rather than a payroll tax, the Buffalo News reported. Like Cuomo, Schimminger’s idea is to reduce the amount paid as income tax. By making the payment a charitable contribution, Schimminger noted, it would be fully deductible for federal tax filing purposes.
Tax experts said some charitable contributions to governments — most often school districts or for the purchase of land to protect the environment — are already deductible. However, whether the Internal Revenue Service would allow such payments for much larger and more basic state and local government expenses is uncertain.
A plan — or at least more detail — is scheduled to be revealed in Cuomo’s budget presentation to the State Legislature on Tuesday.
A Cuomo administration budget official said the proposed payroll tax also could be used to raise more revenue by seizing some of the tax cuts promised to corporations and the wealthy under the federal tax law, as a way to shore up state finances.
The budget official said the many variations of the proposals could be tweaked to raise revenue to better balance the winners — some of them big corporations and the wealthy — and losers — some middle class families — under the new federal tax law.
“We’re getting a lot of good ideas and there are a lot of ways this could be constructed,” the official said on condition of anonymity because the plan continues to be crafted. The administration is working with major accounting firms to work within the federal law and exploit loopholes, the state budget official said.
There is some legal precedent. A state payroll tax has already been used on a regional scale to benefit the Metropolitan Transportation Authority and suburban taxpayers.
Currently, costs for parental leave, unemployment insurance, sick leave and other specific costs are paid through payroll taxes and are legally deductible for companies.
Similarly, tax-deductible charitable donations have been legally used for years for narrow purposes, such as to fund student resources at private schools in many states and to purchase land to protect environmentally sensitive areas, the tax experts said.
Neither the payroll tax nor the conversion of tax payments to charitable contributions, however, has been done on a large scale. California and New Jersey are among the other states exploring the ideas now, tax experts said.
“This is states engaging in self-help,” said David Kamin, a professor at New York University School of Law who studies budget and tax policy.
University of California Berkeley professor Alan J. Auerbach said converting some of the income tax into a payroll tax “is straightforward. States can certainly do that.”
“It seems quite plausible,” said Frederick Treyz, CEO of the private consulting firm Regional Economic Models Inc. that works with businesses and governments nationwide. “If it’s done incrementally, it may be a way to retain some of the [federal] deductibility without necessarily reducing business competitiveness.”
However, Auerbach said the broad use of charitable donations to fund governments and school districts is “based on a very thin justification.”
“I’m not a lawyer, but that seems like a pretty big jump to go from targeted purposes to running a state,” Auerbach said in an interview. “I could see it ending up in court, possibly in the Supreme Court.”
A dozen tax policy professors from major universities nationwide published a report in December titled “The Games They Will Play.” The study detailed loopholes in the federal tax law that states and some taxpayers could exploit to preserve the benefit of the state and local tax deduction, or SALT.
“States can shift from nondeductible over-the-cap state income taxes to still-deductible employer-side payroll taxes,” the economists’ report stated.
The December report also said converting tax payments to charitable contributions has some legal footing.
“Many states already have laws in place granting state income tax credits for donations to certain funds, and the IRS has allowed taxpayers who take advantage of these credits to deduct their payments as charitable contributions rather than as state taxes,” the analysis stated.
Cuomo warns the plan will be complicated. Among the challenges is to fashion a plan that converts a progressive income tax — which applies a higher tax rate to higher earners — to a payroll tax that is traditionally flat, or the same rate, for all employees.
Further muddying the effort would be workers making the state’s minimum wage and working under legally binding labor contracts that could prohibit reducing pretax wages, the experts said.
In addition, snatching any of the federal tax break now promised to corporations while adding the burden of a statewide payroll tax could be opposed by companies the state is trying to keep in New York and help grow.
Opposition is also lining up to block the measure, including from the national Tax Foundation, which said states should instead focus on reducing their taxes. If adopted on a large scale in New York and California, the measure would sabotage Trump’s federal tax law by sapping its revenue stream while compounding federal deficits years down the road, according to the tax experts.
“The payroll tax idea is not nearly as simple as it sounds,” said E.J. McMahon of the fiscally conservative Empire Center think tank. “In fact, any attempt to broadly displace the . . . [personal income tax] with a payroll tax would be fraught with mind-bending complications and virtually impossible to implement.”
GOV. ANDREW M. CUOMO’S TAX PLAN
Here is how a state budget official and tax policy professors said it could work:
- An employee and an employer would agree to lower the employee’s annual wage by the amount he or she normally would pay in state income tax. For example, a $100,000 wage could be reduced by $6,000 to $94,000.
- The employer then, in effect, would make the employee’s state income tax payment through an equal amount of state payroll tax. The employee would benefit from a lower annual taxable income, reducing his or her federal income tax.
- The company would still pay out a total of $100,000 — $94,000 to the employee and $6,000 in a new payroll tax. For the company, wage and payroll tax payments are deductible on federal tax returns and the goal of the Cuomo administration would be to make the company whole.
- The state would still get its $6,000 in tax revenue.