3 Solutions to New York Tax Inequities

By:
William F. Berardi, CPA
Published Date:
Feb 1, 2016

In 2012, Gov. Cuomo tasked the New York State Tax Reform and Fairness Commission to review the state’s complex tax code and recommend ways to simplify it. The commission’s final report, issued in 2013, highlighted several areas of tax inequality that remain on the state’s books. I’d like to focus on three of them along with solutions that would simplify complexity, improve compliance, and less hassle for taxpayers and their practitioners, in general.

Solution 1: Pension Taxation

Included in the commission's report is a New York State Tax Burden Study, prepared by the Office of Tax Policy Analysis (OPTA). Here’s the introduction:

“One of the fundamental questions policy makers ask about taxation is ‘Who pays taxes?’ This question strikes at one of the key criteria for evaluating tax system design – tax equity. While everyone agrees that the burden of taxation should be distributed fairly, there is disagreement about what is “fair.” In order to analyze fairness, public finance economists have developed definitions of equity based on an individual’s ability to pay. Horizontal equity requires that people with equal capacity should pay the same amount of tax, while vertical equity states that people with greater ability should pay more.”

The report goes on to note that the personal income tax (PIT), generates $40 billion, the single largest source of state revenue, which represents over 60 percent of all state revenues collected by the state Department of Taxation and Finance.

There is, however, underlying fundamental inequity in state tax law; in some circumstances, the state's PIT policy violates both horizontal and vertical equity. This is the crux of the problem: Income in any amount received from public pensions regardless of age is not subject to New York State personal income taxes, while private pension recipients over the age of 59½ can exclude only the first $20,000 per year from state personal income taxes. The report is silent on whether this situation is factored into the OPTA data and charts.

I suggest that New York do what many other states have done, and begin taxing this pension income to bring all its recipients in line with those who are still on a salaried income.

Solution 2: Sales and Use Taxes for Beverages

Shouldn’t the state adopt and enforce rules and regulations that do not create a financial advantage for businesses that fail to follow the rules? Why should a business that complies with the rules be at a financial disadvantage with the business that doesn’t comply?

The prepayment and collection of sales tax at the distributor or wholesale level for all alcoholic beverages could relieve many financial pressures borne by the state audit department and small retailers currently burdened with recordkeeping, collection, and payment. Imagine the reduction in the tax gap and the savings in collection and litigation resources if every convenience, grocery and liquor store, bar, and restaurant started remitting the majority of its sales tax upfront, similar to the way New York has taxed gasoline and cigarettes over the past 30 years. Perhaps the state could extend this to non-alcoholic beverages as well.

It is important to understand, however, that I am not suggesting the state changes the tax, merely the way in which it is collected and accounted for.

Solution 3: Business Use Tax Reform

The state should expand the compensating use tax collection system by including lines on corporate, partnership, and other entity income tax forms, similar to the information currently collected on personal income tax forms. The state should include paper reminders with every relevant state communication dealing with licensing or permits, such as: "Reminder: If you bought it out-of-state, remember you owe sales tax. Go to this website, call this number, or write to us to pay it."

The state currently publishes a chart calculating how much use tax individuals should pay, depending on their federal adjusted gross income. The state can do the same on its business tax forms.

On a related note, the state should phase in a requirement for separate sales tax bank accounts and require more frequent, meaning weekly or daily, payments for all certificate of authority holders. This is similar to what state lottery vendors are required to do.

Implementation of these recommendations through changes in policy and education could result in improved compliance for the department and less hassle for taxpayers, a win-win situation. It's comparable to how fire departments work in keeping fires from starting in the first place: They're trained to fight fires, but it works to everyone's advantage if the first focus is on fire safety.


Berardi_pictureWilliam F. Berardi, CPA, who has been in the practice of public accounting since 1979, is a principal of Berardi, Gottstine & Miller CPAs P.C.  He has been a member of the NYSSCPA and AICPA for over 30 years. He has been a board member of the NYSSCPA Mid-Hudson Chapter and served a term as president.  He was the recipient of the 2012 Michael H. Urbach, CPA, Community Builders Award presented by the NY Council of Nonprofits, Inc. and the NYSSCPA. He can be reached at 845-338-1619 or bberardi@hvcbiz.rr.com. 

 
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