The recent Federal tax reform certainly includes significant changes to the Internal Revenue Code but it will also likely lead to substantial changes to the tax laws of certain states, like New York. The primary reason for these potential changes are that the Federal reform will adversely affect the residents of certain States to an intolerable degree.[1] The main provision in the Federal reform that is prompting State action is the limit on the deduction of state and local taxes.[2]
Before the tax reform, taxpayers could reduce their federal taxes by deducting state and local taxes from their taxable income.[3] Now, taxpayers can only make those deductions up to $10,000.[4] This limit includes state and local income and property taxes.[5] Because of this new limit, states like New York with high state tax burdens, are now strategizing on how to change their tax codes to offset the effects of the new Federal law. The average deduction for state and local taxes in New York County is $60,400 and 45% of residents take these deductions.[6] It is likely that the new cap on these deductions will hurt many New Yorkers, and so a plan to avoid these tax increases would be extremely welcomed. However, there has been significant debate regarding the likelihood of success for certain changes aimed at neutralizing the effects of the Federal reform. It is also uncertain how businesses will react.
The ideas that have been announced in New York include a new payroll tax and government-charitable donation tax credits.[7] The payroll tax idea would abolish State income tax on employee wages and recuperate those funds by adding a tax on the employer. The payroll tax would still be deductible, with no limit, under the Federal reform.[8] This would only eliminate a state tax on wages and not on other forms of income such as alimony or interest. Thus, employees may pay more federal taxes because of the cap on state tax deductions, but they could also have more net income due to no state tax on wages. For example, if an employee has less than $10,000 in state and local taxes, this plan would easily increase their net income. This is especially true because the new federal standard deduction for a single individual is $12,000.[9] However, employers would most likely try to decrease gross wages to pay for the new payroll tax even though it could be deducted for federal tax purposes.[10] Decreasing gross wages would save employers money without necessarily lowering employees’ net pay because employees would no longer have a state tax on their wages under this plan.[11]
This plan’s success largely depends on how the numbers work out. For employees, the decrease in wages must be offset by the increase in net pay. For employers, the increase in taxes must be offset by a deduction on federal taxes and most likely a decrease in gross wages paid. Employers in New York also have an increasing limit on how much they can decrease wages, with the state minimum wage set to reach $15.00 per hour in the next few years.[12] Due to these practical concerns, a state tax credit may also be given to employers to compensate for the new tax expense.[13] Moreover, the payroll tax plan may also be optional, thereby creating a system where small businesses have some flexibility in their tax planning. This is important because every business has different costs, staff numbers, and long term goals. However, some businesses may not be able to afford a payroll tax even with tax credits. State politicians are still planning the exact route they will take with respect to a tax reform such as this payroll tax idea.
In addition to the payroll tax, the charitable donation idea would also allow New Yorkers to take advantage of one of the remaining deductions available to taxpayers. The federal reform still allows charitable donation deductions and actually increases the amount of income that can be deducted for it.[14] Under this strategy, New Yorkers would donate money to New York State and they can deduct these donations from their taxable income, thus reducing their federal tax burden.[15] However, the state will probably need to offer tax credits in order to motivate taxpayers to give up an amount of money that will affect their federal taxes.[16] These are only two ideas being debated in Albany. Although there may be a lot of debate about the best plan, all the debate is to ensure that the State’s residents are better off.
[1] Joe Harpaz, Tax Reform Isn’t Over — Here Come The States, Forbes (Jan. 12, 2018), https://www.forbes.com/sites/joeharpaz/2018/01/12/tax-reform-isnt-over-here-come-the-states/#62c8581713da.
[2] See id.
[3] See id.
[4] Bloomberg, The Major Changes in the New Republican Tax Code, https://www.bloomberg.com/graphics/2017-republican-tax-proposal/ (last updated Dec. 26, 2017).
[5] See id.
[6] Ben Casselman & Patrick McGeehan, How New Yorkers Would Lose Under the Republican Tax Bill, N.Y. Times (Dec. 4, 2017), https://www.nytimes.com/2017/12/04/business/economy/tax-bill-new-york.html.
[7] Rick Moriarty, Cuomo: Change Way NY Collects Taxes to Counter GOP Tax Law, N.Y. Upstate (Jan. 17, 2018), http://www.newyorkupstate.com/news/2018/01/cuomo_change_way_ny_collects_taxes_to_counter_gop_tax_law.html.
[8] Jesse McKinley & Vivian Wang, Restructuring New York’s Taxes Sounds Good. Now for the Details, N.Y. Times (Jan. 4, 2018), https://www.nytimes.com/2018/01/04/nyregion/new-york-payroll-tax-income-tax-plan.html.
[9] Kelly Phillips, What the 2018 Tax Brackets, Standard Deductions and More Look Like Under Tax Reform, Forbes (Dec. 17, 2017), https://www.forbes.com/sites/kellyphillipserb/2017/12/17/what-the-2018-tax-brackets-standard-deduction-amounts-and-more-look-like-under-tax-reform/#34336d491401.
[10] Economist, How States May Try to Circumvent Republicans’ Tax Reform, (Jan. 4, 2018), https://www.economist.com/news/united-states/21734027-and-why-fans-state-and-local-tax-deduction-should-not-hold-their-breath-how-states.
[11] See McKinley & Wang, supra note 8.
[12] New York State’s Minimum Wage, https://www.ny.gov/new-york-states-minimum-wage/new-york-states-minimum-wage (last visited Feb. 1, 2018).
[13] See McKinley & Wang, supra note 8.
[14] New York State Department of Taxation and Finance, Preliminary Report on the Federal Tax Cuts and Jobs Act 2 (Jan. 23, 2018), https://www.tax.ny.gov/pdf/stats/stat_pit/pit/preliminary-report-tcja-2017.pdf.
[15] See id.
[16] See id. at 3.
