ALBANY – The Cuomo administration is proposing an optional payroll tax to shield New Yorkers who pay high property taxes from having to pay more under the newly enacted federal tax law.
Gov. Andrew Cuomo on Monday announced that his 30-day budget amendments will include an “employer compensation expense tax.” Details on what the legislation would look like were scant as of Tuesday, but will be included in the governor’s 30-day budget amendments scheduled for release on Thursday.
The tax overhaul Republican President Donald Trump signed in December caps aggregate deductions for state and local taxes at $10,000—which may increase the federal tax liability for many homeowners in high-tax states such as New York and New Jersey.
A proposal to impose a payroll tax on employers, still legally deductible on federal taxes, would be an effort to avert some of the immediate negative effects of the federal tax overhaul on New York residents, many of whom stand to lose some of their state and local tax deductions under the cap.
Under Cuomo’s proposal, employers that opt into the payroll tax would be subject to a 5 percent tax on all annual payroll expenses in excess of $40,000 per employee. The proposal would be phased in over three years starting January 2019. The personal income tax system would remain in place and the new tax credit corresponding in value with the employer compensation expense tax (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,” a press release from the governor’s office said.
Under the legislation proposed by the Democratic governor, the deadline for employers to opt into the payroll tax would be Oct. 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,” Cuomo’s office said in a press release.
Republicans who control the state Senate have already bristled at Cuomo’s proposal to levy a payroll tax on employers. At a press conference Tuesday morning, Senate Majority Leader John Flanagan said he “can’t comment” on Cuomo’s payroll tax proposal because he hasn’t seen the specifics.
“I will say this: a payroll tax, that makes my head spin. But there are no details. The 30-day amendments are not out other than some press release,” Flanagan, a Republican from Suffolk County, told reporters.
“Until we see the details, my visceral reaction is that all of my colleagues are opposed to that,” Flanagan added, casting doubt that such a proposal could be done by the Legislature before the new fiscal year begins April 1.
Stuart Lazar, a tax policy professor at the University at Buffalo School of Law, said the “devil is certainly going to be in the details” of Cuomo’s tax proposal to be unveiled later this week.
Lazar said he would be “very interested to see what [Cuomo's] proposal is” and whether the federal IRS would accept New York’s “way of getting around the limitation of the state tax deduction,” he added.
Cuomo’s plan wouldn’t “protect the average New Yorker,” Lazar added, but rather “the wealthy New Yorkers” who are high earners and pay high property taxes.
Owing to the high cost of living downstate, however, many middle-class New Yorkers technically fit that description. In Manhattan, for example, a household of five with an income of more than $197,000 can be considered middle-class, according to a Pew Research Center report in 2016.
The Democratic governor also proposed a plan to create charitable donation programs, which could allow residents to lower their property tax bill by donating to health care or education. Last week, New Jersey Gov. Phil Murphy called upon the state’s mayors to allow residents of the state to pay property taxes to a charitable fund set up by local governments to circumvent the $10,000 cap on state and local tax deductions.
Since the tax overhaul was signed into law by Trump late last year, Cuomo has rallied against the cap on the deductibility of state and local taxes, arguing that the federal government was punishing blue, or Democratic, states. In mid-January the Cuomo administration’s Department of Taxation and Finance issued a report offering a menu of options on how to overhaul the state’s tax structure. One of the proposals in the report would keep the state’s current income tax and levy a payroll tax on employers based on each employee’s tax withholding.
Late last month, the governors of New York, New Jersey and Connecticut announced that they are forming a coalition to sue the federal government over the newly enacted tax overhaul. The Democratic governors argued that the federal tax law violates states’ rights. Legal experts doubted whether such a lawsuit would be successful.
Employers would have to “carefully consider the shift of tax liability and administrative costs when evaluating this election,” said Heather Briccetti, a lawyer who is president of the Business Council of New York State Inc., referencing the opt-in payroll tax.