On February 15, 2018, Governor Cuomo announced the release of the 30-day amendments to the 2018-2019 Executive Budget. While in most cases the 30-day amendments predominately contain technical changes, in this case they contain significant new tax proposals. The Governor describes the proposals as “advancing further reforms . . . to safeguard our competitiveness and help protect residents from this federal economic assault.” They include the creation of an optional employer payroll tax system, the creation of state and local charitable funds with corresponding credits allowed against state and local taxes for donations, and the decoupling from several provisions of the federal tax code:
1. Implementation of a new optional payroll-based Employer Compensation Expense Tax. In the most ambitious proposed amendment, beginning on January 1, 2019, and phased in over three years, employers in New York may elect to be subject to a new payroll-based Employer Compensation Expense Tax (“ECET”). The ECET would subject the employer, after the phase-in is completed, to a 5% tax on all annual payroll expenses in excess of $40,000 per employee. The tax is expected to be deductible by the employer for federal income tax purposes. For employees, the personal income tax would remain in effect, but they would receive a prescribed tax credit against that tax.
2. Creation of two state-operated charitable funds, and authorization of the creation of additional charitable funds at the local level. The proposed legislation would create two new State-operated charitable funds for the purposes of improving healthcare and education in New York. An individual taxpayer who makes donations to the funds could claim a state tax credit of up to 85% of the donation for the tax year after the donation is made. In addition, individuals who itemize deductions could claim the charitable contributions as deductions on their state tax returns and, the Governor assumes, on their federal returns. However, it is unclear whether the IRS would allow a charitable deduction for the full amount of the contribution, at least to the extent the taxpayer is receiving a dollar-for-dollar State tax credit for 85% of the amount. The proposed legislation would authorize school districts, counties, towns, cities, and villages to create similar charitable funds.
3. Decoupling from certain federal income tax provisions. The proposed legislation includes several provisions decoupling from federal tax law with the stated purpose of protecting individuals who would otherwise face tax increases. These changes include:
• Decouple from the $10,000 federal cap for deductions of state and local taxes. Because under New York law State itemized deductions start with federal itemized deductions, the federal cap on SALT deductions could otherwise lower the amount of itemized deductions available at the State level.
• Eliminate the requirement that taxpayers may only itemize deductions on their New York return if they itemize on their federal return, and decouple from the other changes to federal itemized deductions imposed by the new law.
• Maintain the State standard deduction for single filers by amending existing language in the Tax Law to remove the reference to federal exemption amount.
4. Decoupling from partial federal deduction for repatriated foreign income. For corporate taxpayers, the amendments clarify that taxpayers must add back the partial federal deduction for repatriated foreign income since that income is already exempt from New York taxation as “other exempt income.” Otherwise, taxpayers would reap a windfall by deducting amounts that New York State does not tax.
5. Exempting from estimated tax underpayment penalties disallowed interest expenses attributable to exempt CFC income.
The proposed legislation exempts from underpayment of estimated tax penalties disallowed interest expenses attributable to exempt controlled foreign corporation (“CFC”) income or to the 40% reduction of such exempt income in lieu of interest expense attribution. The exemption applies to interest expenses attributable to the one-time repatriation of foreign income, and is only applicable for tax years beginning on or after January 1, 2017, and before January 1, 2018. The deadline for enactment of the New York State budget is April 1, 2018. While it is possible that the Governor will propose additional executive budget modifications before that date, they would require the Legislature’s consent.