New York: Lawmakers use new budget to restructure tax code
Characterizing it as the “most difficult budget” the state had ever produced, Gov. Andrew Cuomo jokingly asked why everyone looked so tired at his press conference announcing the $168 billion agreement for fiscal year 2019. The governor was especially pleased that lawmakers completed their “herculean task” two days early while also hitting all of his top priorities.
These priorities were the following:
- Defending against “that federal tax increase”
- Investing in education
- Fighting sexual harassment
- Protecting the democratic process, safeguarding the environment, and growing the economy
Gov. Cuomo contended that the state’s $4.4 billion deficit necessitated a restructuring of New York’s tax code to combat the “federal attack on our economy.” By this he meant the “baloney” $10,000 cap on the deductibility of state and local taxes (SALT) put in place by the federal Tax Cuts and Jobs Act of 2017. Likewise, the press release issued by the governor’s office states:
“The recently enacted federal tax law has negative fiscal implications for many New Yorkers. By gutting the deductibility of state and local taxes, the law effectively raises middle class families’ property and state income taxes by 20 to 25 percent. New York is fighting back against the federal plan and the loss of both income tax deductibility and property tax deductibility.”
To this end, the new budget “decouples the state tax code from the federal tax code, where necessary, to avoid more than $1.5 billion in State tax increases brought solely by increases in federal taxes.” The budget creates a credit against property taxes for contributions to new charitable funds, and creates a voluntary payroll tax to shift tax liability away from the personal income tax. In addition, it continues the phase-in of middle class tax cuts, among other things.
The press release details these efforts:
Charitable funds - The budget creates two new state-operated Charitable Contribution Funds to accept donations for the purposes of improving health care and education in New York. Taxpayers who itemize deductions may claim these charitable contributions as deductions on their federal and state tax returns. Any taxpayer making a donation may also claim a state tax credit equal to 85 percent of the donation amount for the tax year after the donation is made. In addition, the legislation authorizes school districts and other local governments to create charitable funds. Donations to these funds would provide a reduction in local property taxes (via a local credit) equal to a percentage of the donation.
Payroll tax - While federal tax reform eliminated full state and local tax deductibility for individuals, businesses were spared from these limitations. Under the new budget, employers would be able to opt in to a new Employer Compensation Expense Program (ECEP) structure. Employers doing so would be subject to a five percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on Jan. 1, 2019. The progressive personal income tax system would remain in place, and a new tax credit corresponding in value to the ECEP would cut the personal income tax on wages and ensure that state filers subject to the ECEP would not experience a decline in take-home pay.
Middle class tax cuts - Average savings from the middle class tax cuts will total $250 in 2018 and, when fully effective, six million New Yorkers will save an average of $700 annually. Once completely phased in, the new rates will be the lowest in more than 70 years—dropping from 6.45 to 5.5 percent for incomes ranging from $40,000 to $150,000 and from 6.65 to 6 percent for incomes ranging from $150,000 to $300,000. The new lower tax rates will save middle class New Yorkers $4.2 billion annually by 2025.
In addition, the budget helps taxpayers achieve additional savings by way of the following:
Growing the county-wide shared services initiative to deliver savings for taxpayers: The budget includes $225 million to fund New York’s match of savings from shared services actions included in local property tax savings plans. It also continues the county-wide shared services panels for another three years, and amends a statutory hurdle that prevented localities from sharing some specific services.
Creating a voluntary retirement savings program: The budget authorizes the New York State Secure Choice Savings Program—a voluntary-enrollment payroll deduction IRA for employees of private employers that do not already offer retirement savings plans. This program will give millions of New Yorkers who currently have no access to an employer-provided retirement plan the opportunity to save for retirement, all while alleviating the burdens on participating New York employers of creating and sponsoring a retirement plan on their own. Participation is voluntary for businesses and employees.
Continue the local Property Tax Relief Credit: The Property Tax Credit, enacted in 2015, will provide an average reduction of $380 in local property taxes to 2.6 million homeowners this year alone. By 2019, the program will provide an additional $1.3 billion in property tax relief and an average credit of $530.
Not in the budget
When Gov. Cuomo gave his state of the state speech in early January, he announced legislation that would close the carried interest loophole, the “Fairness Fix,” which we described at the time. This is one provision that did not make it into the budget.
Nor did Gov. Cuomo’s proposed tax on online marketplaces, Bloomberg reported, to the delight of many. One stakeholder, the director of northeast states for the Internet Association, urged lawmakers to wait for the Supreme Court to decide South Dakota v. Wayfair, which we have been writing about regularly, and which is expected to resolve the question of whether states can tax online purchases when the seller has no physical presence in that jurisdiction. Oral arguments are scheduled for April 17, 2018.
Ohio also incorporating federal changes into state tax law
On March 30, Gov. Kasich signed into law a bill to incorporate federal changes into Ohio’s tax law, SB 22. The bill analysis lists some of the most significant of these changes, all but one of which will first apply to taxable years beginning Jan. 1, 2018, or thereafter. For business owners, these changes include:
- A limit on pass-through entity (PTE) losses that an owner may claim in a taxable year, to $250,000 ($500,000 for joint filers).
- An increase in the limit on the value of business property that may be “expensed,” or deducted as a current expense (rather than a capital expense), in the year in which the property is acquired.
- An increase in the bonus depreciation allowance, from 50% to 100%, in the first year for purchases of certain qualifying property used in business, applicable to property placed into service after Sept. 27, 2017.
- A limit on the amount that may be deducted as a net operating loss (NOL), to 80% of taxable income, and the repeal of the ability of a taxpayer to “carry-back” an NOL to previous years, with some exceptions.
- A limit on the deduction for business interest that may be taken in a taxable year, to 30% of modified income.
- Changes in the rules governing business accounting methods.
- The repeal of an income exclusion for gains from exchanges of like-kind business property, unless the property is real estate.
- Changes affecting the determination of a partner’s share of a partnership’s income or loss.
Changes affecting individuals include these:
- The repeal of an income exclusion for up to $20 of the amount an employer reimburses its employee for bicycle commuting expenses.
- The repeal of a deduction allowed for moving expenses incurred by a taxpayer that relocates for work, unless the taxpayer is a member of the Armed Forces.
- A prohibition on the re-characterization of certain Individual Retirement Account (IRA) contributions.
- A change in the treatment of alimony income, such that alimony will be considered income for the recipient, and cannot be deducted by the payer.
In addition, SB 22 expands Ohio’s 529 education savings plan so that earnings used for K-12 education expenses may qualify for favorable federal and state tax treatment. Ohio law allows a state income tax deduction for contributions to a 529 plan. The deduction is limited to $4,000 per beneficiary per year for the taxpayer, or the taxpayer and the taxpayer’s spouse, regardless of whether the taxpayer and spouse file separate returns or a joint return. Annual contributions in excess of $4,000 per beneficiary may be applied in subsequent years. SB 22 renders 529 plan contributions eligible for this deduction even if they are used to pay for K-12 education expenses instead of post-secondary expenses.
The bill analysis explains that the legislation is needed because periodic amendments to federal law do not become part of Ohio law unless they are incorporated by an act of the General Assembly.