LEGISLATIVE AFFAIRS: Governor Cuomo Proposes to Replace State Income Tax With State Payroll Tax

Philip Weiden | January 2018

New York State is facing a budget deficit in the upcoming fiscal year. The budget is due by April 1st and faces a potential shortfall of $4 billion. Both political parties will point to the other as the culprit and both parties likely have valid points on why the state finds itself in this position.

Republicans will point out that the state borrows and spends and taxes too much and Democrats will claim that federal cuts to states and the elimination of the SALT deduction will hurt taxpayers and deprive the state government of much needed revenue. There is validity to both arguments.

In response to the recently passed federal tax reform law, Gov. Cuomo is proposing a payroll tax instead of the current income tax. The big advantage of this is that it would be tax deductible to the businesses paying it under current federal law as the employer would pay the payroll tax upfront. It is in a way also a kind of income tax, but is calculated differently and is taken out on both the employer and employee sides.

The benefits of it are that it could be deductible, which is a positive work around for New York State. The other positive is that it would likely not be a tax on 1099 employees since they are paid by commission or possibly by other means. This could also head off potential proposals to increase state-wide mortgage recording or transfer taxes that would further inhibit home ownership in New York, which is also hurting. That is the positive side to this.

On the negative side such a plan could be incredibly hard to implement and complicated for companies to comply with as a completely new system would then have to be established, which could take a great deal of time. Another question might be whether the federal government would take steps to then eliminate payroll deductibility. Still another issue would be the reaction to employees accepting smaller paychecks to offset the payroll tax. The bigger question may be whether this will go anywhere in the state legislature as what is economically best and what is politically best can often be very different things.

Stay tuned for updates as this plan is fleshed out.

Philip Weiden
Legislative Affairs columnist Philip Weiden is the Government Affairs Director for the Hudson Gateway Association of Realtors.