When Gov. Andrew Cuomo gave his state of the state speech on Jan. 3, 2018, he spent much of it lamenting the challenges that New York faces, which, he argued, are made much worse by the federal tax bill that caps the deduction for state and local taxes (the SALT deduction) at $10,000 when not incurred through a trade or business.
He continued this theme with the budget address that he delivered on Jan. 16, 2018, the highlights of which are posted on office of the governor’s website as follows:
- State operating funds spending is $100 billion - an increase of 1.9 percent (state operating funds exclude federal funds and capital)
- All funds spending $168.2 billion for FY 2019
- Protects New Yorkers from federal tax assault
- Closes carried interest loophole
- Increases school aid by $769 million - doubling the statutory school aid growth cap and bringing total investment to $26.4 billion
- Provides $7.5 billion in state support for higher education in New York- an increase of $1.4 billion or 24 percent since FY 2012
- Provides $118 million to continue the successful excelsior scholarship and extend the income cap to $110,000
- Establishes a new opioid epidemic surcharge
- Imposes a healthcare insurance windfall profit fee
- Defers large corporate tax credits
- Continues the phase-in of the middle class tax cut for six million New Yorkers - saving households $250 on average and $700 annually when fully effective.
The Fiscal Year 2019 Executive Budget Briefing Book contains the details of the plan, Stand United To Fight For New York, and concedes that even without the federal constraints, “this was going to be a difficult year for New York State’s Budget.” The state faces these major obstacles:
- A $4.4 billion shortfall, driven by declining revenues, expounded by a $2 billion cut in Federal funding for health care that could rise to $5 billion in the out years.
- A pressing need to renew infrastructure, expand the economy, and continue to grow opportunity for all New Yorkers.
This despite the good news that “taxes are down for every New Yorker, middle class tax rates are at their lowest level since 1947, corporate tax rates are at the lowest level since 1968, and the manufacturers’ tax is at the lowest level since 1917. The State’s two percent property tax cap, enacted in [the governor’s] first year in office, has kept those levies in check as well.”
The outlines of the plan include the following, among others:
Continuing the trend of fiscal responsibility. To this end, the budget:
- Holds state spending growth to under 1.9 Percent for eighth consecutive year.
- Ensures debt affordability.
- Maintains New York’s improved credit rating, which now is at its highest since 1972.
- Maintains general fund reserves of $2.5 billion, up from $1 billion ten years ago. including $500 million for debt management.
- Holds spending for state agency operations flat.
Keeping New York economically competitive, by way of the following:
- Protecting New Yorkers from the federal SALT deduction cap by:
- Challenging it in court, as violations of states' rights and equal protection.
- Leading the nation’s resistance to the new law with a repeal-and-replace effort, “Tax Fairness for All” campaign.
- Exploring restructuring options.
- Continuing the phase-in of the middle class tax cut. In 2018, average savings will total $250 and, when fully effective, six million New Yorkers will save $700 annually. Once fully phased in, the new rates will be the lowest in more than 70 years – dropping from 6.45 to 5.5 percent for incomes ranging from $40,000 – $150,000 and 6.65 to 6 percent for incomes ranging from $150,000 – $300,000. The new lower tax rates will save middle class New Yorkers $4.2 billion, annually, by 2025.
- Continuing the local property tax relief credit that was enacted in 2015. In 2018, it will provide an average reduction of $380 in local property taxes to 2.6 million homeowners, and when fully phased in by 2019, the program will provide an additional $1.3 billion in property tax relief and an average credit of $530.
Investing in 21st century transportation infrastructure, via efforts that include:
- Continuing into the fourth year of the $59 billion transportation capital plan, which is enhancing and expanding the Metropolitan Transportation Authority (MTA) network, and improving roads, bridges, airports rail facilities, ports and transit systems funded through the Department of Transportation (DOT) budget. This includes providing $254 million in operating aid to address system failures, breakdowns, delays and deteriorating customer service.
- Investing $29.9 billion in the MTA’s transit capital program, including $8.6 billion in funding from New York state – the highest state investment ever.
- Expanding cashless tolling.
- Expanding autonomous vehicle operations.
Beyond these, the budget includes measures to support local governments, invest in K-12 education, expand access to higher education, safeguard the environment, protect health and safety, solve the homelessness problem, advance the women’s agenda, create a smarter, fairer justice system, drive economic growth and development, and prepare the workforce of tomorrow.
Immediate action on closing the carried interest loophole
In his budget speech, the governor criticized the federal government for leaving in place “the so-called ‘carried interest’ loophole.” Two days later, he announced the legislation that would close it, the “Fairness Fix.” The governor explained:
“[u]nder current federal law, a portion of income earned by hedge fund managers, private equity investors, venture capitalists and certain real estate investors - known as carried interest - is treated as capital gains, rather than as ordinary income. As a result, this income is afforded favorable tax treatment in the form of lower capital gains tax rates. This loophole costs the state approximately $100 million every year.”
The Fairness Fix would “equalize the tax treatment of income for private equity investors,” and is projected to raise nearly $1.1 billion annually, while also mitigating the effects of the federal SALT cap. It does this by treating carried interest as ordinary income for New York State tax purposes, and imposing a “fairness fee to eliminate the benefit from preferential tax rates that exist at the Federal level.”
The Fairness Fix will only take effect “when functionally identical legislation is enacted in Connecticut, Massachusetts, Pennsylvania and New Jersey,” to help the state sustain its regional competitiveness.
Report on the Federal Tax Cuts And Jobs Act
As if to emphasize New York’s focus on blunting the effects of federal actions, the Department of Taxation and Finance revised its Preliminary Report on the Federal Tax Cuts And Jobs Act on Jan. 23, 2018, just a week after it was first issued on Jan. 17, 2018. The report provides a framework to carry out the measures that Gov. Cuomo set forth in both the budget address, and the state of the state speech that we covered in a Jan. 11, 2018 piece, related to restructuring of the state tax code. The governor also spoke of court action, but this is not part of the report.
Especially impactful is the Tax Cuts and Job Act’s permanent reduction of the corporate tax rate from 35 percent to 21 percent, characterizing it as one of the “most consequential changes,” and the reductions of individual tax rates, increased standard deductions, and the elimination of personal exemptions: “Because the State’s income tax system conforms to, and interacts with, the federal system in numerous ways, federal changes will have significant flow-through effects on the state taxes that New Yorkers pay and the revenues the State collects.”
The report is divided into four sections:
- Part I outlines a proposal to increase charitable giving in New York.
- Part II discusses various options for reducing the state’s reliance on the personal income tax and adopting an employer compensation expense tax, including the possibility of a voluntary employer opt-in system.
- Part III outlines options for consideration of an unincorporated business tax.
- Part IV discusses the impacts of the Tax Cuts and Job Act on New York’s tax system and potential responses.
Ultimately the department recommends that these sections be analyzed in conjunction with four key objectives:
- Promoting fairness for New York’s taxpayers in light of the new limitation on the deductibility of state and local taxes, which negatively impacts New York relative to other states.
- Protecting the progressivity of New York’s tax system and the investments and services that benefit New Yorkers and beyond.
- Protecting and enhancing the competitiveness of New York’s economy.
- Maintaining New York’s revenue base in both the short- and long-term.