ALBANY -- New York may end its income tax and instead expand its payroll tax as a way to outmaneuver the new federal law that limits deductions for state and local taxes.
Gov. Andrew Cuomo said Wednesday during his State of the State address that he is exploring how to make the complicated switch, joining other high-tax states in considering how to protect residents' tax deductions and state revenue.
California and New Jersey leaders have also discussed similar steps, such as programs to allow people to pay charitable contributions to their state governments -- rather than pay income taxes.
"It's a question of our competitiveness long term and preserving the strength of New York state and New York's state economy," Cuomo said, "at a time when we have federal government that is giving other states a structural competitive advantage against us."
Cuomo also said New York will sue the federal government to fight the tax law, and he vowed to lead a national effort to get the law repealed.
Responding to Washington
Business groups and Republicans have criticized Cuomo's positions, saying New York should find way to lower taxes rather than look to fiscal gimmicks.
"Overhauling our tax code should include a thorough examination of our existing unsustainable spending, not imposing a potentially complicated payroll tax on employers," said Mike Durant, state director of the National Federation of Independent Business.
Cuomo, who is seeking re-election in November and is a potential presidential candidate in 2020, is expected to provide more details about his plans in his proposed state budget later this month.
The ideas are aimed at combating the $10,000 cap on state and local tax deductionsput into the federal tax plan approved by Congress and President Donald Trump last month.
It hurts high-tax states' wealthy residents who easily exceed the cap. The average deduction in California, New York, and New Jersey were each over $17,000 in 2015, according to the Government Finance Officers Association.
Since some residents won't be able to deduct their full state taxes when they itemize their income taxes, a move toward a broader payroll tax could be a way to protect income, supporters say.
Income taxes would end, but employers would then essentially collect the same in payroll tax from employees. Employers and employees would be taxed more, advocates say, but it would still allow for the full deductibility of taxes.
And most importantly for states, it could allow them to maintain their level of tax revenue and avoid residents leaving for lower-tax states.
It would also, to the delight of Democrats in high-tax states, limit how much the federal government would collect in new tax revenue to fund its $1.7 trillion tax cut.
"If the income tax is reduced by the same amount as the payroll tax, the state gets the same amount of money, the worker ends up in the same place and the Republicans don't get to screw the blue states," Dean Baker, an economist at the Center for Economic and Policy Research, a left-leaning think tank in Washington D.C., wrote Dec. 20.
Charitable contributions
Cuomo also noted the charitable contribution option.
Some states, like California, are considering a way to set up a charitable organization so residents can donate to the state to pay for programs and services in lieu of paying income taxes -- thus allowing the contributions to be deductable.
In California, Senate President Pro Tem Kevin de León has had a bill to create a California Excellence Fund to "allow a credit equal to the amount contributed by the taxpayer" to the state.
Exploring ways to usurp the federal tax plan should be considered as a way to protect taxpayers and the state coffers, Democrats and progressive groups in New York said.
"It's really complicated, as the governor said, but I think it's a requirement now for us to look at ways to work within the construct the federal government has set up and really try to shield every day New Yorkers from the harmful impacts," Assembly Majority Leader Joseph Morelle, D-Irondequoit, Monroe County, said.
Democrats in the state Legislature have pushed for higher taxes on the wealthy, but that plan faces an increasingly uphill battle because of the federal tax overhaul.
Cuomo, instead, suggested he might look at other ways to protect state tax dollars, noting he may want to end a so-called carried interest loophole that benefits Wall Street.
"It is complicated, it is difficult, but it is clear that we must protect New York taxpayers from this assault," Cuomo said.
Still, there are plenty of unanswered questions, including the legality of the ideas and how the federal government would respond.
Also, New York has a progressive income-tax system where higher income residents pay more in taxes. A switch to a payroll tax would complicate it, said E.J. McMahon, founder of the fiscally conservative Empire Center, an Albany based think tank.
Any plan would need to assure lower and middle-income New Yorkers aren't hurt, said Ron Deutsch, executive director of the Fiscal Policy Institute, a labor-backed group in Albany.
"Looking at the swap between payroll and income taxes is interesting." Deutsch said. "But it is potentially fraught with some pitfalls that would need to be addressed. We would need to make sure it is fair and equitable."
Still, Rep. John Faso, R-Kinderhook, Columbia County, said Cuomo should look to his own state budget before knocking Washington. Faso voted against the tax bill, but has been critical of state spending.
"Changing to a payroll tax system would be extremely complicated and will likely be met with resistance from taxpayers and businesses alike," Faso said in a statement.
"The solution is to lower the cost of government in New York and make our state a place where businesses can create jobs so our people don't have to flee.”
