The Independent View: NY Workaround to Trump’s New Tax Law

New York will create an optional Payroll Tax and New Charitable Funds, called the “Employer Compensation Expense Program,” will allow its Residents to skirt New Federal Limits on the Deductibility of State and Local Taxes, Officials said, becoming the First State to enact Workarounds to the Trump Administration’s New Tax Law. The New State Budget will be approximately $168 Billion Budget also includes Decoupling the State’s Tax Code from the Federal Code, as well as creating Two State-Operated Charitable Funds that will allow Taxpayers the Option to Claim Education and Health Care Contributions as Deductions on their Tax Returns.

The Legality of the Workarounds is in question, and New York Lawmakers probably would prompt a Court Challenge. New York is among a handful of States that have considered enacting ways to help Residents find ways to avoid Losing the Tax Benefits they’ve enjoyed from Deducting State and Local Taxes on Federal Returns.

The New Tax Law Caps at $10,000 the amount of State and Local Taxes that Individual Taxpayers can Deduct. In New York, Cuomo’s Office estimates that will cost 1.7 Million Taxpayers an estimated $14.3 Billion. That’s just under a Fifth of the State’s Taxpayers, and Primarily affects New York City and its affluent Suburbs.

“Whether these provide relief depends on how the IRS rules on them,” said Kathy Wylde, President of Partnership for New York City, which represents Businesses in New York. “But it is certainly important that both the city and state are trying to neutralize the penalties New Yorkers are going to suffer under the new federal law.”

Gov. Cuomo, who has Presidential ambitions, is among State Officials who have slammed Trump’s New Tax Law. “It puts us at a structural disadvantage going forward ad infinitum because every other state is just getting the tax cut. We're getting the tax cut and the loss of deduction,” Cuomo said last month in a Speech at Marist College. “These are all ways to dodge the missile that Washington has launched at us.”

A similar Bill in California has passed One House of the Legislature but is pending in the other. A New Jersey Bill that would permit Towns and Cities to give Homeowners Tax Credits in exchange for counting Property Tax Payments as Charitable Contributions is poised for a Final Vote in the Legislature next Month. Democratic Gov. Phil Murphy has pledged to Sign the Bill.

“Residents will get every possible deduction that is still available under the new federal tax law, including some that result in lower revenues for state and city government,” Wylde said. “The governor and leaders are to be congratulated for that.”

New York is proposing to create Two Trust Funds jointly Administered by its Comptroller, a separately Elected Official, and its Tax Commissioner, a Gubernatorial Appointee. The Money in the Funds would be used to support Elementary and Secondary Education as well as Health Care, on which New York spends roughly $50 Billion a year. Under Cuomo’s initial Proposal, Donors would be able to Deduct those Donations against their Federal Income and receive an 85% Credit against their State Income Tax Liability. School Districts and Local Governments could set up similar Funds, for which Cuomo initially proposed a 95% Credit.

Officials at the Internal Revenue Service (IRS) have not said whether such Donations would be considered Legitimate Deductions for Federal purposes. State Rep. John J. Faso (R-19th District, Kinderhook) asked Treasury Department Officials for their Opinion, but he hasn‘t gotten a response. “You don’t want to send people down a path which ultimately will not lead to the result they’re trying to accomplish,” said Faso, who was one of Five Republicans from New York to Vote against H.R. 1. “That’s the choice of the executive and the Legislature, but I do think a more thorough airing of the proposal would be advisable.”

Some Tax Law Experts have blessed the Donation-and-Credit arrangements and note they exist in other States for a variety of Causes. Jared Walczak, a Senior Policy Analyst at the Tax Foundation, has argued that they do not pass muster and said New York was “most likely to form a test case.” “Existing statutes, case law, regulations are all fairly clear on this point: these are not legitimate charitable contributions and would not count, but certainly the water’s been muddied on this by various legislative proposals, and the state could be gearing up for a legal battle,” Walczyk said.

Cuomo said in his January State of the State Address that he was planning to Sue the Federal Government over the Tax Bill, but no Challenge has materialized.

In addition to the New Charitable Funds, New York is Decoupling Provisions in its Tax Law from the Federal Revenue Code, moves that have Broad, Bipartisan support and would have resulted in a “Stealth Tax” to New Yorkers. And the State will also create an Optional Payroll Tax, still fully Deductible under Federal Law, for Businesses to Pay for their Employees. Wylde and Long Island Association President Kevin Law said they were happy this Provision was Optional and could provide Relief for some Sophisticated Firms with highly-Compensated Employees. But as part of this option, Employees could see a reduction in their Take-Home Pay.

Deputy State Senate Majority Leader John DeFrancisco (R-50th District, Syracuse), who is Running against Cuomo this year in the Gubernatorial Election, repeated that the SALT workarounds are Misleading, Foolish and “an Administrative Nightmare.” “It just doesn’t make any sense and it will be proven as such,” he said.