The two provisions — one creating a new “charitable” fund to replace local property taxes, and the second a largely technical change in how taxes are assessed — aim to help taxpayers avoid a new $10,000 cap on the amount of state and local taxes they can deduct from their federal taxes. The cap was imposed by congressional Republicans to raise money to offset their law's steep cut to the corporate tax rate, but critics say it was designed to hurt residents of liberal states.
“We had to restructure our tax code to avoid the attack,” said Cuomo, who spearheaded the changes. “They launched a missile, and we were standing in the target zone of the missile because of our tax code.”
Both provisions passed as part of New York's budget, but they face significant hurdles. If successful, they could provide a template for Democratic-controlled statehouses around the country where lawmakers have vowed to protect their voters from tax increases under the law.
One of the changes allows taxpayers to make “donations” to a special state fund that will go toward health care and education. In exchange for their donations to the fund, taxpayers get a sizable tax credit to offset their state tax burdens. In theory, classifying the payments as charitable contributions rather than local taxes would help New Yorkers avoid hitting the cap. In the new law, New York also gave local governments and school districts the right to create their own similar funds.
The second provision allows employers to opt into a new voluntary payroll tax, since payroll taxes remain fully deductible under the GOP tax law. The companies can then deduct those payments from their federal taxes. The provision would enable employers to reduce their workers' federal taxes to offset the loss of their deductions under the new $10,000 cap.
California, New Jersey and Connecticut are among the liberal-leaning states where legislators have expressed interest in pursuing similar schemes. Residents of states on the coasts are more likely to face a tax hike under the law and more likely to see a higher tax hike.
But some tax experts doubt that the Internal Revenue Service would allow taxpayers to classify these gifts to the state as “donations” that can be deducted. And while experts say the new payroll tax rests on sturdier legal ground, it's not clear how many businesses would avail themselves of the complicated conversion necessary.
“I'm still highly skeptical this will be a successful effort. Congress clearly said there would be a limit on the deduction of state income taxes, and this would appear to be state income taxes by another name,” said Mark W. Everson, who served as commissioner of the IRS from 2003 to 2007 and now works at the tax consulting firm Alliantgroup.
Other analysts have questioned the feasibility of the payroll tax workaround, saying it would require businesses to make complicated reorganizations of their payment structures.
“Employers can’t just slash salaries willy-nilly, even if there’s a good argument for it being to the employees’ benefit,” wrote Jared Walczak of the Tax Foundation, a right-leaning think tank. “It might be an option for small groups of highly-compensated employees — think hedge funds and consultancies — but it’s a tough sell for a larger operation with a more diverse workforce.”
But other legal analysts have said the charitable tax deduction workaround will work, citing existing if smaller-scale programs in other states. Cuomo's team spent hundreds of hours consulting with tax attorneys and other tax experts about the legislation, according to state officials. Some experts say the payroll change is likely to offer real relief to businesses and taxpayers, and they expect other states to quickly adopt similar plans.
“New York is exploiting a stupidity of the system where the GOP is allowing certain people to deduct and others to not,” said Philip Hackney, a tax expert at Louisiana State University. “It's a smart move for the state.”