Specific legal language regarding Gov. Andrew Cuomo’s proposals is set to be released Thursday. | Kevin P. Coughlin/Office of Governor Andrew M. Cuomo Cuomo administration proposes optional payroll tax, will set up state funds to donate taxes

ALBANY — New York will allow businesses to opt into a new payroll tax Gov. Andrew Cuomo hopes will “thwart” new federal limits on the deductibility of state and local taxes.

Cuomo, a Democrat positioning himself for a possible 2020 presidential bid, has focused his political capital this year on attacking the federal tax bill, H.R. 1 (115), and saying the state would rewrite its tax code to allow residents of the high-cost, high-tax Empire State to skirt the new $10,000 deduction cap on income and property taxes.


Specific legal language regarding Cuomo’s proposals is set to be released Thursday, Budget Director Robert Mujica told reporters during a Monday briefing. Many of the options were previously described in a report issued by the state’s Department of Taxation and Finance.

In addition to the new optional payroll tax, New York will set up two funds allowing taxpayers to donate money in support of education and health care and will allow school districts and municipalities to run similar donation-and-credit systems.

It’s all necessary, the men say, because losing SALT deductions will add bite to the state’s tax burden and make New York less competitive. They estimate SALT is worth $14.3 billion to 1.7 million taxpayers, but critics say that is misleading because it doesn’t account for positive impacts from lower rates and a high standard deduction.

And while it only affects one-fifth of New York taxpayers — the majority of people simply take the standard deduction — they account for an outsize portion of state revenues. If they flee, Mujica said, it would “cripple” the state’s fiscal picture.

“We were paying more, we get less of the tax cut than anybody else, we end up paying even more as a result of the federal bill,” Mujica said, noting the state now sends more than $40 billion more to the federal government than it receives in benefits.

Here are the details of Cuomo’s proposal:

— The payroll tax would be optional, and would likely be most attractive to downstate employers that pay high wages or give bonuses. “We’ve talked to a lot of businesses, both big and small. All of them had different concerns,” Mujica said. “We want to make sure that the employers have an option should they want to protect their employees.”

— The tax targets payroll on wages in excess of $40,000, and would rise from 1.5 percent to 5 percent over three years, Mujica said. The personal income tax would remain across the board, but employees of firms that opted into the payroll tax schema would receive a credit against their state income tax liability for the amount of payroll tax assessed on their wages.

As such, Mujica stressed, employees would be made whole. He said they could reduce their income tax withholdings to prevent a situation where they are waiting until they file their return to recoup the extra levy.

— Everything would be revenue neutral for the state, Mujica said, and if taxpayers’ gross wages are reduced, their take-home pay should stay the same.

— Like California, New York would create new “charitable contribution funds” for health care and education and give taxpayers an 85 percent non-refundable state income tax credit against their donations. The idea, Mujica said, is to allow a taxpayer to fully deduct donations against their federal income and then, since the state already appropriates tax dollars for each purpose, to reduce state income tax liability.

New York raises around $49 billion in personal income tax, and is projected this year to spend $26 billion in aid to public schools and $23 billion on the federal Medicaid program — the two largest spending areas of the $168.2 billion budget.

Mujica said it would be “up to the Legislature” to determine what to do with this money, including the likely possibility New York would concomitantly reduce its appropriations relative to the amount of donations received.

— Unlike other states with similar systems, including Arizona, the donations would be directed to a segregated fund controlled by the state itself — not an independent charity or foundation.

— Local government entities that are largely funded by property taxes, including school districts and municipalities, would be allowed to set up their own donation-and-credit systems, Mujica said. There would not be a centralized foundation or system, just guidelines.

— New York will decouple from the federal tax code, as Mujica promised last week, to prevent a $1.5 billion “stealth tax hike” that would have resulted from several legal quirks.

— New York will not, now, create an unincorporated business tax similar to one that is in place in New York City. Many small business owners currently pay the state through the personal income tax, and switching to a UBT would have allowed for full deductibility.

“It’s just an enormously complicated method of taxation, trying to determine sources of income, where things come,” Mujica told reporters. “We’re still pursuing that, we will advance that, but right now we’re not ready for bill copy on Thursday.”

The proposals do not face a clear path in the Legislature, but by including them in budget amendments, the governor’s team are hoping to force their adoption as part of the larger spending plan — which is due by March 31.

Experts have urged the state to proceed slowly with respect to its tax code, as the effects — what does reducing someone’s gross wages due to their eligibility for Social Security, how can that work if an employee is unionized — are multi-faceted and complex.

Mujica said his team has proceeded deliberately to get to this point.

He did not offer an estimate as to how many firms might opt for the payroll tax, but said if it were fully adopted it could produce $4 billion in savings. Business groups have previously said it would be most attractive to downstate firms with high wages in sectors like law, financial services and media.

“Employers will have to carefully consider the shift of tax liability and administrative costs when evaluating this election,” stated Heather Briccetti, president of the Business Council of New York State. “The creation of a charitable contribution mechanism is more palatable to the state’s business community, but its value will depend on IRS deductibility.”

Indeed, there are real questions about how the Internal Revenue Service will look at the new donation-and-credit schemes popping up in blue states. Legal scholars have made the case going both ways: supporters say they should be upheld if there is not a full offset and a specific purpose, but detractors say they should be annulled because you cannot deduct a contribution for which you receive a benefit.

Mujica said New York has to try.

“We’re living within the confines of the structure that they have done. If they decide they want to challenge things, we’ll deal with them at that level, but we have to pursue these options because they’re taking all of this money away from New York,” he said. “There are people making decisions now. So, as government we should be acting as quickly and swiftly as possible to give them as much reassurance that we’re fighting for them and making sure they can keep as much of their money as possible.”