On December 22, 2017, President Donald J. Trump signed into law the federal Tax Cuts and Jobs Act of 2017, which enacted sweeping changes to how businesses and individuals are taxed beginning in 2018. At the request of Governor Andrew M. Cuomo, the New York State Department of Taxation and Finance prepared a 33-page report containing various New York State legislative proposals in possible response to that legislation. Preliminary Report on the Federal Tax Cuts and Jobs Act (N.Y.S. Dep’t. of Taxation & Fin., Jan. 2018). This comprehensive report, prepared by the Department under considerable time constraints, is intended to serve as a roadmap of issues that may need to be addressed, possibly as part of the New York State budget.
The report first presents a series of possible proposals, many of which seek to minimize the effects on New York individual filers of the new $10,000 cap on the federal deductibility of state and local taxes.
• Charitable deductions to State-operated charitable funds. One approach would be for New York State to create State-operated charitable funds, to which taxpayers could contribute in support of certain State programs and services, and which (the Department believes) would be deductible for federal income tax purposes.
• Employer payroll tax. A far more significant undertaking would involve the creation of a new employer payroll tax on employee W-2 wages, presented under various alternative permutations. Such a system would be based on the assumption that, although state taxes are no longer deductible by individuals, they continue to be deductible for businesses. It also assumes that employers that would bear the State payroll tax cost would have the ability to reduce employee wages commensurate with their payroll tax liability. The report presents alternatives for implementing a new payroll tax and retaining the existing personal income tax for nonwage income. The Department acknowledges the complexity of such a system, including the difficulties in making the restructured tax system progressive.
• Unincorporated business tax. Another possible option for shifting nondeductible State income taxes to businesses would be through the creation of a State unincorporated business tax on pass-through entities, with a tax credit available to the owners against their State personal income taxes.
The report also discusses issues relating to federal conformity for individuals, such as the federal expansion of the standard deduction and the limitation of various itemized and nonitemized deductions.
Finally, the report identifies various issues resulting from changes to the federal corporate tax regime. These include changes relating to how corporations with foreign operations will be taxed, limitations on interest expense deductions, and 100% expensing for certain business assets.
The Department is seeking comments on its report, and has set up a comments page on its website. While the Department has expressed no official view regarding the intended timing of the possible legislative proposals, the contemplated restructuring of the State personal income tax to preserve the full federal state tax deduction for individuals seems particularly ambitious and subject to a multitude of assumptions that would seem to weigh against its enactment by the April 1, 2018 budget deadline