Restructuring New York’s Taxes Sounds Good. Now for the Details.
Posted January 4, 2018 8:43 p.m. EST
ALBANY, N.Y. — For Gov. Andrew Cuomo, the idea must seem like sweet payback for the pains inflicted on his state by the new federal tax plan: an elegant workaround whereby New York could replace its state income tax with a payroll tax and leave Washington, not Albany, on the hook for billions of dollars in lost revenue.
But like so many white-paper plans, the proposal — while still in its larval stage — is already running headlong into a barrage of practical questions about how precisely such a switcheroo might work.
“The more you think about this,” said E.J. McMahon, a conservative economist and founder of the Empire Center for Public Policy, “the more it makes your head spin.”
The basic premise of the governor’s idea, suggested at Cuomo’s annual State of the State address Wednesday, is one also being mulled in other high-tax states bracing for the impact of the new tax plan’s sharp curtailment in the deductibility of state, local and property taxes, which is expected to cost many residents in places like New York, New Jersey and California.
One version of the plan would work like this: Eliminating the state income tax on wages would put more money in worker paychecks and mitigate the loss of full deductibility of such taxes on the federal level. That revenue would instead be raised by a statewide payroll tax, paid by employers, and still legally deductible on their federal taxes. The state would then make employers whole through a tax credit or some other mechanism. In theory, the only loser would be the federal treasury, which is anticipated to take a colossal financial hit from the Republican-backed plan.
Potential pitfalls were already filling inboxes.
Business groups wondered, for instance, if such a move might prompt the Republican-led Congress to return fire and eliminate payroll-tax deductibility. Economists said the complexity of the tax code made pushing through such a radical change quickly unrealistic. And tax experts puzzled at the possible real-world application of such a scheme, which might well involve asking millions of employees to accept cuts in their gross pay in order to offset gains in their net pay.
Such questions were asked even before New York officials had divulged how their plan would work; the governor’s office on Thursday reiterated that such an idea was being reviewed as part of a broader restructuring of the state’s tax code, although a clearer picture would likely emerge when Cuomo, a Democrat, unveiled his budget this month.
Gaining political support in Albany was hardly a sure thing: Democratic leaders in the Assembly were supportive of the payroll tax — “It makes a lot of sense,” Carl E. Heastie, the Assembly speaker, said Wednesday — but Republicans in the Senate were more skeptical, even though some may warm to such ideas if constituents in their districts see their taxes increase under the new tax bill.
Perhaps the biggest hurdle to Cuomo’s proposal, some said, was the same reason it was attracting so much attention.
“It’s never been done; it’s never been tried,” said Nicole Kaeding, an economist at the Tax Foundation, a nonprofit think tank in Washington. “It’s an interesting thought experiment, but it’s very different to put that into actual practice.”
Kaeding said the idea of switching the state income tax for a payroll tax was one that until recently had lived only in academia — and even there, only for a few weeks, she said, as economists recently began discussing the implications of a switch and brainstorming responses.
But even so, she said, the governor’s proposal struck her as “largely a political conversation.”
“It’s very different to confront these actual policy questions and develop a workable solution,” Kaeding said.
Brian Galle, who teaches tax law at Georgetown University’s law school, said that one knotty issue would be how to counterbalance the increased tax burden to employers. A state credit for employers could solve the problem, he said, but the federal government might seek to tax that credit, too.
Another option would be to reduce the gross pay of employees, since they would no longer have to pay the state income tax, Galle said. Yet another alternative would be for the state to keep its income tax but also implement an additional payroll tax, the revenue from which would be funneled back to taxpayers as a credit or wage supplement.
But those latter two options might run the risk of confusing New Yorkers seeing a short-term cut in their paychecks, even if they would eventually recoup the costs after filing their taxes, Galle said.
“They would see it as a pay cut,” he said, adding that it could be a very difficult sell to taxpayers — and voters.
Kaeding agreed: “It would be very tough to explain to most individuals how this would actually work and why they would not be impacted,” she said.
Robert Mujica, the governor’s budget director, disagreed. “This would increase workers’ take-home pay,” he said. “The current federal plan reduces their take-home pay by eliminating deductibility. Workers make more, not less.”
One constituency whose reaction will be closely watched is the state’s business community, which was cautious about the governor’s proposal, citing the lack of details. “At the moment, there’s nothing to reject,” said Kenneth J. Pokalsky, vice president of Business Council, adding that his group was encouraged by the governor’s general interest in restructuring the tax code.
“It’s a necessary and important exercise to see how we match up state code with the reformed federal income tax,” he said. “And this may or may not be part of that evaluation.” Critics of Cuomo pounced on the proposal as a pipe dream for a governor who had fought the Republican tax plan. “It’s a desperate turn to a complex, untested policy,” said Douglas Kellogg of Reclaim New York, a government advocacy group that has been backed by some prominent conservatives.
But tax experts said swapping the income tax for payroll tax could actually face some of the stiffest opposition from traditionally left-leaning groups, a potential irony for Cuomo, who has characterized his opposition to the tax plan as a fight for progressive values in the face of s a vengeful, conservative Washington.
Negotiating lower gross salaries, for example, could be a difficult task in cities with long-term contracts for public sector workers and their unions, a potent and powerful political force in New York, particularly with Democrats like Cuomo. (Cuomo’s promise on Wednesday to protect collective bargaining rights drew one of the loudest rounds of applause of his speech.)
“A pay cut would be a nonstarter in almost any conceivable universe,” McMahon said.
Eliminating the state income tax, Galle said, would also eliminate specific benefits written into the state income tax code. Gone would be the state income tax code’s incentives for the renewable energy industry. Gone would be the incentives for charitable contributions, or for organ donations.
And while Cuomo has railed against the impact of limits on state and property tax deductions on the middle-class, Kaeding said eliminating the state income tax could favor high-income earners, as payroll taxes — such as the federal ones that pay for Social Security and Medicare — are generally flat rate.
Rich Azzopardi, a spokesman for Cuomo, said the administration did not fear Congress yanking the payroll tax deduction if they proceeded with the idea, saying the federal tax plan showed them to be loyal to big-money companies. “If they were willing to hurt the rich corporations, we wouldn’t have the law we have that benefits them at the expense of the middle class,” he said.
Still, they conceded that many of the ideas for restructuring the tax code were still being worked out internally, including the renewable energy and other incentives mentioned by Galle.