Cuomo's New York Tax Plan Could Face Hurdles

By Mike VilenskyFeaturesDow Jones Newswires

Gov. Andrew Cuomo is expected to lay out a plan early this year to overhaul New York's tax code in response to the new federal tax law, but analysts are warning such a proposal likely would pose challenges.

Mr. Cuomo, a Democrat, has lambasted the Republican-backed federal law for capping federal tax deductions in ways that disproportionately affect favorable to high-tax blue states such as New York, New Jersey and California. The governor has pledged to put that issue at the center of his 2018 legislative agenda and his aides are exploring various workarounds to the new law.

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"You have to look at each wrinkle and then try to iron that one out and then try to fix that one," said Cuomo budget director Robert Mujica, who is working on the potential state tax proposals.

Congressional Republicans have defended the tax law as giving a break to people in most brackets and said the state and local deductions benefitted more higher-income residents than middle-income filers.

Mr. Cuomo's plan is expected to dominate conversations in Albany for the next few months as legislators haggle over the details and analysts weigh in. Similar proposals are also being considered in New Jersey and California.

New York's Democratic Assembly Speaker Carl Heastie said he is open to the changes. A spokesman for New York's Republican Senate Majority Leader John Flanagan said the conference is waiting to hear the governor's proposal -- expected as soon as January 16th. Mr. Flanagan has said he wants do "whatever we can. to keep aspects of state and local tax deductibility."

Replacing Income Taxes with Payroll Taxes

New York effectively could replace part of its income tax on individuals by making up the revenue with an equivalent payroll tax on employers, Mr. Mujica said.

Under the new law, businesses can deduct payroll taxes from their federal income taxes, so this idea offers a way to preserve the benefits of deductibility by shifting the deduction from individuals to their employers. Individuals who didn't itemize their federal deductions under the former laws could newly benefit from this shift.

There are practical and political challenges if Mr. Cuomo advances such a measure. Most notably, the new payroll tax likely would come out of workers' paychecks.

"There are a lot of reasons you can't simply adjust peoples' wages with the wave of a hand," said Jared Walczak, an analyst for the conservative nonprofit the Tax Foundation. "Many individuals may not understand why their salary is going down, even if they are better off under the proposal."

The state wants to find a way to leave take-home pay unchanged, Mr. Mujica said.

Expanding Charitable Contributions

New York could incentivize charitable contributions to local and state governments or to affiliated public projects and set up funds that allow individuals to donate to such funds rather than pay their full income taxes.

Because charitable contributions aren't limited under the tax law the same way state and local tax deductions are, expanding them could preserve a benefit that charitable donors get in the form of a federal tax break.

It is not clear yet how the state might encourage such contributions and whether the IRS would attempt to limit or bar such a practice.

"The federal government's going to have to make decisions," Mr. Mujica said. "We think we're working within the parameters of the law."

David Kamin, a tax professor at New York University Law School, said the Internal Revenue Service has allowed similar contributions before in other states, but would have to decide if the potential new system is a break from what the agency previously has allowed, or if it wants to "reverse its positions on these setups entirely."

New State Deductions

New York's Independent Democratic Conference -- a group of state Democrats who work in a bipartisan coalition with the Senate Republican majority -- have proposed letting taxpayers deduct state and local taxes that exceed the new federal cap from their state income taxes if they make less than a certain amount.

Sen. Jeff Klein, the leader of the GOP-allied Democratic faction, said the measure would cost the state about $450 million annually, but that hopefully it would only be necessary for one year if Democrats take back Congress and change federal laws, he said. "In the meantime, we have to do everything possible right away to not devastate homeowners," he said.

Mr. Cuomo's office didn't comment on Mr. Klein's proposal.

Corporate Tax Changes

Unlike individuals, corporations can still deduct state income taxes from their federal taxes. Combined with the cut in the federal corporate tax rate spurred by the new federal law -- to 21% from 35% -- that rule is leading some businesses to consider becoming corporations so they could get the full benefit of that deduction. Mr. Mujica said New York is looking at ideas to accommodate that shift.

Kathy Wylde, president of the Partnership for New York City, a group of businesses, said many of the proposals would be complicated but "there was general enthusiasm from my members that the governor is taking a hard look at what could be done."

Write to Mike Vilensky at mike.vilensky@dowjones.com

(END) Dow Jones Newswires

January 07, 2018 16:36 ET (21:36 GMT)