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Gov. Cuomo Proposes Adopting Payroll Tax in Response to Tax Law's Cap on SALT Deduction

Chris Gaetano
Published Date:
Jan 3, 2018

New York  Gov. Andrew Cuomo proposed adopting a payroll tax system as part of a three-part plan to meet the challenges presented by the new federal tax law, which he characterized as an "all-out attack on New York's economic future." The provision caps state and local tax deductions at $10,000, where previously they were unlimited. 

Speaking during his annual State of the State address on Jan. 3, Cuomo specifically addressed the cap on the State and Local Tax (SALT) deduction, which was a major part of the new federal tax bill. Cuomo said that limiting this deduction effectively raises New Yorkers' taxes by 20 to 25 percent across the board, when the state already gives $48 billion more to Washington than it gets back. The governor said there is no possible justification for this except naked partisanship. The new tax law, he said, is "robbing the blue states to pay for the red states."

"Washington's tax plan now uses New York and California as piggy banks to finance tax cuts for Republican states. It is crass and ugly and partisan legislation, and an economic civil war. They are aiming to hurt us," he said. 

Cuomo outlined his three-step process for responding to the tax law. He said that, first, New York  state plans to sue the federal government, as he believes the measure amounts to federal double taxation, as well as violates states' rights and equal protection. Second, he will launch an effort to "repeal and replace" the bill as part of a "Tax Fairness for All Campaign." 

The third step he proposed is a major restructuring of New York's tax system. Cuomo said that he will propose reducing the state's reliance on the current income tax system and adopt a statewide payroll tax system. An academic report released in December noted that such a switch would mean that employers would still be able to deduct the taxes. This would result in lower wages for employees, however, as they would essentially have the tax imposed directly upon them, but this reduction in wages would be deductible against federal income taxes since it lowers overall adjusted gross income (AGI). The paper notes that if this sort of switch becomes a trend, then it could "wipe out all savings from repeal of the SALT deduction—and then some. This is because most taxpayers do not itemize, but this strategy, in effect, could make a sizable portion of all current state income taxes deductible." 

Cuomo also said that the state will increase the number of charitable organizations to which contributions are tax deductible. While Cuomo did not go over the fine details of what this plan would involve, the academic paper said that state governments could possibly offer a tax credit for charitable donations made to state and local governments, or specific parts of state and local governments. The paper noted that there's already precedent for such a thing, as states do offer credits to tuition at tax-exempt private schools. 

The governor also addressed property taxes in the state. While they have long been a barrier to economic growth, Cuomo said that with the federal government capping the SALT deduction, property taxes are now "an economic cancer." He called on local governments to find more ways to cut costs, which he said has now become a matter of economic survival. While reforms have already produced $200 million in savings in 34 counties, the governor said more can be done, and that he plans to put this issue at the top of the agenda for this year. 

The governor acknowledged that these changes would be difficult, but said the state could not afford, literally and figurative, inaction. 

"We have no choice. If we do not fix this problem it is a question of the state of New York's economic viability long term. It is a question of [being] competitive long term. And preserving the strength of New York state and New York state's economy at a time when we have a federal government that is giving other states a structural competitive advantage against us, we're not going to let that happen. We are New York state. We have faced challenges internationally, domestically, and the threat from this federal government is not going to derail the great state of New York, I promise you," he said. 

Beyond addressing the SALT deduction limits, Cuomo also said that he is working with legislative and local government partners to end what is known as the carried-interest loophole, a lower tax rate for hedge fund managers and other financial-sector managers, which he said amounted to a "Wall Street giveaway." He also proposed lowering middle class income tax rates to the lowest they've been since 1947, and expanding the Excelsior free college program. 

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