New York State Responds to Federal Tax Reform – A Two Part Series

In this two part series covering New York States’ Response to the Federal Tax Reform, we will address the state’s major goals and changes.

New York is the first of many high-tax states to pass changes in laws to combat the impact the TCJA will have on NY taxpayers. Under the Trump administrations tax overhaul, itemized deductions for state and local income, property and sales taxes are limited to $10,000 a year. The proposed tax reform for NY determines that limitations from the TCJA will cost NY taxpayers an additional $14.3 billion a year. Governor Cuomo has pushed through a plan at an attempt to shield NY state residents from this hike through the Executive Budget. Provided below is an outline of proposed tax reform for New York State:

The report proposed four primary goals to achieve:

  1. To promote fairness for NY taxpayers.
  2. To protect the progressivity of NY tax system and the investment’s and services that benefit the State’s residents and beyond.
  3. To protect and enhance the State’s economic competitiveness.
  4. To maintain the State’s short and long-term revenue base.

The following provides a brief summary of the provisions included in the Budget Bill that are intended to address potential issues for New York from the TCJA.

How NYS responds to the Federal Tax Reform

  • Implementing an Optional Employer Compensation Expense Tax System.Under the Budget Bill, a new optional payroll-based “Employer Compensation Expense Program” (ECET) gives employers in NY the option to pay a new payroll tax, as payroll taxes remain fully deductible under the GOP tax law. This legislation allows employers to opt in to the ECET system, in which employers would be subject to a 5% tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on January 1, 2019. The phase in rates starts at 1.5% in the first year, 3% in the second & 5% in the third. Under the legislation, the deadline for the first annual election for employers to opt-in is December 1, 2018 for the 2019 tax year. Benefits associated with this election for employees would include income tax relief as it would enable lower federal taxes in order to offset the loss of their deduction under the new $10,000 cap. Employers would also benefit as a tax credit is available to offset income tax in the amount equal to the payroll tax.
  •  Create Additional Opportunities for Charitable Contributions to Benefit New YorkersThe budget sets up two new state-run charitable contribution funds to replace property taxes. Taxpayers can pay money to support health care and education in NY. Those who donate to these funds can receive a state credit equal to 85% of the donation amount to offset state tax burdens. Additionally, if classified as a charitable contribution instead of property taxes, taxpayers can receive an itemized deduction for charitable contributions instead of hitting the state taxes cap. School districts and other local governments are allowed to create charitable funds in order to provide this credit.

Stay tuned for part 2 covering Decoupling from the Federal Tax Code to protect New York Taxpayers from Tax Increases, and other thoughts on what the NYS budget bill may be missing.  

For additional questions on the New York State Budget Bill reach out to a member of our business tax or personal tax team today.