NY Governor's Proposed Payroll Tax Would Be Opt-In

Chris Gaetano
Published Date:
Feb 13, 2018

New York Governor Andrew Cuomo has formally proposed a set of budget amendments that, among other things, would create an optional payroll tax on employers as a way to blunt the impact of the federal SALT deduction cap. Companies that opt in would be subject to a new five percent "Employer Compensation Expense Tax" on all payroll expenses in excess of $40,000 per employee. The amendment would also introduce a corresponding income tax credit linked to the value of the ECET that is meant to ensure workers will not experience a decline in take-home pay. Participating employers would receive another credit to cover administrative costs. The first annual election for employers to opt-in to this alternative system would be Oct. 1, 2018 for the 2019 tax year. The tax would be phased in over three years: it would be 1.5 percent in the first year, 3 percent in the second year, and 5 percent in the third. 

Cuomo first raised the possibility of a payroll tax in his State of the State address earlier this year. He said that the new tax law, passed by the Republicans late last year, unfairly targeted Democratic-controlled states which tend to have higher income and property taxes. By capping deductions on State and Local Taxes (SALT) to $10,000, which before had been unlimited, the governor said that the provision effectively robs blue states to finance tax cuts in red states and vowed to fight the measure. 

The governor also proposed creating two new state-operated Charitable Contribution Funds that exist ostensibly for improving health care and education in New York. Those who donate to these funds would be able to claim their contributions as a deduction on their federal and state tax returns, as well as get a state tax credit equal to 85 percent of the donation amount for the tax year after the donation was made. Beyond this, the budget would also authorize school districts and other local government entities to create similar charitable funds, donations to which would provide a credit against their local property tax bills equal to a percentage of the donation. This was another possible solution to the SALT deduction cap posed during the State of the State address. 

The New York Business Journal said small businesses so far have been skeptical of this plan, with many owners saying they already received hefty tax breaks through the federal reforms, and so why would they change their tax structure to do something that has no direct benefit for them? 

Mark Klein, a speaker at the Foundation for Accounting Education's conference "Impact of the New Tax Law: a Sid Kess Workshop" on Jan. 31, was similarly skeptical as to whether either a payroll tax or a charitable fund could function as an effective workaround to the SALT deduction cap.  Klein said that this measure isn't as simple as it might seem, as it might in fact even further increase taxes for some people, such as out-of-state workers. Further, by definition, the payroll tax would only be applicable to those on a payroll, which leaves out things like self-employment income or capital gains, both of which also represent a significant portion of revenue for the state. This means that the workaround would not cover as many people as an unlimited SALT deduction.  Klein also felt that it is extremely unlikely that a charitable fund would work, since it flies in the face of many of the rules surrounding what counts as a charitable contribution. In general, for a charitable contribution to be eligible for a deduction, the taxpayer cannot receive value from it; otherwise it's more of a transaction. 

The state budget is due on April 1. 

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