ity any event planner trying to plan a discussion around taxes. As Gov. Andrew M. Cuomo prepares a response to a Republican tax bill he calls an “economic civil war,” New York’s tax landscape is shifting quickly. P
Such was the dilemma for panelists at The Business Council of Westchester’s breakfast event on Feb. 14. While they were brought in to break down what the federal tax reform bill – the Tax Cuts and Jobs Act of 2017 – would mean for Westchester County, an announcement from Cuomo’s office two days before the Valentine’s Day event gave panelists a whole new topic to address.
The governor’s budget director briefed the media Feb. 12 on a number of changes to the state tax code proposed in Cuomo’s executive budget, including an optional payroll tax and the creation of state-run charities for health care and education.
After an hour of discussion by Business Council panelists at Tarrytown’s Tappan Hill Mansion on the federal tax impact in New York, the first question from the audience focused on Cuomo’s proposal for an optional payroll tax.
Titled the Employer Compensation Expense Tax, Cuomo said the proposal is meant to “thwart” a change in the federal tax law that caps deductions for local income and property taxes at $10,000. The cap on what are known as SALT deductions could prove especially damaging in a high-tax state such as New York.
The goal of the payroll tax is essentially to shift parts of the state income tax burden away from employees, whose ability to deduct the tax is now limited, and onto the employers, which face no such cap on deductions.
Employers would opt-in to a 5 percent state tax on payroll expenses above $40,000 per year. The employers could then deduct those payments on their federal tax returns, which state officials say would allow them to save their employees money on income tax. The state income tax would remain in place for employees of firms that opt in to the system, but the employees would receive a tax credit equal to that of the payroll tax on their wages.
The Business Council’s keynote speaker, Edmund J. McMahon, cautioned it’s a policy complicated enough to warrant its own seminar. McMahon, the founder and research director of the Albany think tank Empire Center for Public Policy, called Cuomo’s payroll tax proposal “a solution in search of a problem.”
“The governor is painting with a very broad brush in describing the impact of this tax bill as this terrible, destructive missile, as he calls it, aimed at the economic heart of New York that will result in higher taxes for everybody,” McMahon told the Business Journal after the event. “That’s not true. It will actually result in lower taxes for the majority of New Yorkers.”
The adoption of a payroll tax would be most likely to benefit people with higher salaries losing the large deduction for state income tax, McMahon said.
“It’s really designed for companies that have a cohesive group of higher-paid people and professionals working for them, who can all get together on the notion that, hey, we’ve figured out how to game this… to claw back a few more percentage points of deductibility,’” he said.
While the governor’s press announcement promised that employees under the new system would not see a decrease in actual take-home pay, employers would likely decrease gross wages to make up for the difference in taxes.
Even if the lost gross income is made up for in tax savings, panelists said the change could be difficult to sell to employees.“As a business owner, I can tell you it would be very tough for me to say to my employees, ‘Hey, I just started paying payroll tax and I’d like to drop your salary 5 percent,’” said Joseph Rand, managing partner of Better Homes and Gardens Real Estate Rand Realty. “I don’t know how that would fly.”
McMahon touched on the other major proposal Cuomo announced, which would create state-operated charitable funds for health care and education in New York. The funds would allow interested New Yorkers to swap out their non-deductible state income tax for a deductible charitable donation. Taxpayers could give to either charitable fund, then deduct those contributions from their federal tax return. They would then receive a state tax credit equal to 85 percent of the donation.
McMahon said “it’s highly unlikely the IRS would go along with this, in the opinion of most tax experts. But they’re gonna try it. California is going to try it, New Jersey is going to try it. Then it will litigated.”
As for the main focus of the event – what the federal tax changes mean in the county—expectations were mixed. McMahon pushed back against the idea that the tax changes are “a catastrophe for everybody, especially in Westchester.”
While his presentation focused on the individual tax impact, he noted that the cut in corporate taxes is viewed by most economists as a positive.
“Even the critics say at the very least it’s a sugar high, there’s going to be a bump,” McMahon said. “You’re feeling that bump. And maybe it could be better than a sugar high. That’s a whole other effect.”
New York real estate agents lobbied against the cap on local tax deductions throughout Congress’ consideration of the bill, saying it would remove a major incentive for home ownership. That’s a point Rand picked up Wednesday.
Beyond the SALT deduction cap, he noted the cap on mortgage deductions dropped from $1 million to $750,000.
While he said there are plenty of good things in the bill for Westchester residents, “Real estate got to pay the bill for everybody else.”
But what impact the local real estate market feels is likely to be at the margins, as Rand described it.
“If there is going to be an impact, it’s going to be on people who weren’t going to sell that are now going to sell, and on some people who were thinking about buying who are now not going to buy,” Rand said. “Because real estate became a little bit less attractive a purchase in Westchester County.”
But Rand said the market is in strong enough condition to absorb an increase in inventory from people pushed to sell or even a decrease in buyers from people scared off by the loss of deductibility.
As for the nonprofit sector, United Way of Westchester and Putnam President and CEO Alana Sweeny said the biggest concern is whether taxpayers who no longer itemize their returns will give to charitable causes at the same rate.
The tax code has incentivized individual giving, Sweeny said, since introducing the deduction on charitable donations in 1970. Last year, about three-quarters of donations to charities came from individual donors, outpacing donations from foundation, bequests and corporations.
The question, said Sweeny, is whether people gave because of the tax incentive or simply viewed the deduction as a bonus for giving that they would have done anyway.
“We don’t know the answer, but it appears historically that there is an impact,” Sweeny said of the deduction, that people do give because of the incentive.”
That said, Sweeny said nonprofits should look to see if “they have a win” in the cuts in the corporate tax rate, which could spur more corporate giving.
“Is that someplace that we might be able to get more charitable giving?” Sweeny said. “Charities are going to have to be very strategic in what they’re doing, where they are going for their funding and how they are approaching the charitable giving.”
Mark R. Baran, a principal at accounting firm Marks Paneth LLP, likened the experience of explaining the tax code to clients to a game of whack-a-mole. “Every other day there is a new issue that pops up that needs to be clarified,” he said.
While accountants and advisers are waiting for guidance as to exactly how many of the law’s provisions will be applied, Baran said there are still projections that can be made based on what’s known so far. There are many benefits for manufacturers and other capital-intensive businesses, he said as an example.
“It’s going to be an interesting year for everybody,” he said.