On March 30, 2018, the New York State Assembly passed the 2018-2019 Fiscal Year Budget, providing legislation amending a number of the state’s tax provisions in direct response to recent federal tax reform. New York Governor Andrew Cuomo is expected to sign the budget bills over the next few days.
Federal cap on the state and local tax deduction
According to the governor’s highlights of the budget, the recently enacted federal tax reform effectively raised taxes on many New Yorkers due to the $10,000 limitation placed on the state and local tax (SALT) deduction. New York is often considered a “high tax state” due to high property taxes and personal income taxes, meaning the $10,000 cap on the SALT deduction is achieved much quicker by individual taxpayers in New York than in states with collectively lower taxes.
The FY19 budget aims to provide relief to those taxpayers subject to the cap by: 1) expanding state charitable contributions, and 2) creating an employer compensation expense program.
The FY19 budget creates two new state charitable contribution funds that will accept donations for the purpose of improving health care and education in the state. New York taxpayers are allowed to claim a state tax credit equal to 85 percent of the donation amount for the tax year after the donation is made. The budget also authorizes certain school districts and other local governments to create charitable funds that provide a reduction in local property taxes through a credit based on the donation.
It is still unclear whether the IRS will provide additional scrutiny of state charitable contribution deductions when used in exchange for state income tax credits. The IRS has previously communicated that the primary purpose of a contribution must be donative, which is a disinterested and detached interest of generosity – and not a quid pro quo.
Employer Compensation Expense Program
As another workaround to the SALT deduction limitation, the budget legislation creates an Employer Compensation Expense Program. Employers that opt-in are subject to a five percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on Jan. 1, 2019. The tax is imposed at a rate of 1.5 percent in 2019, 3 percent in 2020, and 5 percent for 2021 and after.
A new tax credit corresponding to the value of the payroll expense tax would reduce the personal income tax on wages in order for state filers subject to the new tax to experience no overall reduction in their tax-home pay.
International tax provisions
The New York state income tax code generally conforms to the federal code on a “rolling basis.” The FY19 budget decouples from the new international provisions, addressing the one-time repatriation transition tax and the foreign derived intangible income (FDII) deduction.
- Section 965 one-time transition tax: the budget legislation amends the definition of “exempt CFC income” to include the one-time transition tax provided that the income is not included in a combined report with the taxpayer. This provision excludes the transition tax from the tax base, but does require an addback for interest expense that was deducted at the federal level. The new provision is effective for tax years beginning on or after Jan. 1, 2017.
- FDII deduction: the budget legislation specifically excludes the 37.5 percent FDII deduction from New York income.
The budget legislation does not specifically address global intangible low-taxed income (GILTI).
Other miscellaneous tax provisions
- Prior law permitted taxpayers who itemized deductions to elect to deduct their New York itemize deductions in lieu of the New York standard deduction. For tax years beginning on or after Jan. 1, 2018, taxpayers may elect to itemize their state deductions if the increased federal standard deduction was claimed. Other changes to the personal income tax include modifications to alimony payments and qualified moving expenses
- Congestion surcharge: Beginning on Jan. 1, 2019, a surcharge is imposed on each for-hire transportation trip that originates and terminates in a “congestion zone” at the rate of $2.75 for most for-hire vehicles (including Uber and Lyft), $2.50 for yellow cabs, and $.75 for pooled trips (separate transportation request by two or more passengers). The congestion zone is defined as the geographic area of Manhattan, south of and excluding 96th street.
- Sales for resale of food and beverages by restaurants, taverns, or other establishments are excluded from the sales and use tax beginning on June 1, 2018