New York State FY 2019 Budget Includes Creation of Optional Payroll Tax

New Yorkers may be able to sidestep the new limit on deductions for state and local taxes with a provision in the state's 2019 fiscal year (FY) budget, signed into law on April 17, 2018, by Gov. Andrew Cuomo. The budget includes a provision to create an optional new payroll tax and two charitable funds. Taxpayers will be able to deduct contributions to those funds from their state and federal taxes. The state's prospective workaround is called the Employer Compensation Expense Program (ECEP).

The new federal tax plan, signed into law by President Trump on Dec. 22, 2017, caps the state and local tax deduction (SALT) at $10,000 for those who itemize their deductions. New York state legislators passed the changes to their tax code to reduce the burden on state residents.

New York seeking to mitigate effects of federal tax reform

In establishing the optional payroll tax and two charitable funds, Gov. Cuomo seeks to protect New Yorkers from tax hikes caused by federal tax reform. In a press release, the governor’s office stated that the state is "disproportionally and adversely" affected by the new federal law, “which already sends $48 billion more each year to Washington than it receives in federal dollars." It also said that eliminating the deductibility of all state and local taxes will cost New York an additional $14.3 billion.

Optional payroll tax will be phased in

New York will phase in the optional payroll tax over three years, starting Jan. 1, 2019. Employers must opt in by Dec. 1, 2018, and then on each subsequent Dec. 1 if they want to continue participation the following year.

In 2019 the annual, per-employee ECEP tax will be 1.5 percent of wages in excess of $40,000. Covered employees will be eligible for a tax credit. The bill states explicitly that state employers cannot "deduct from the wages or compensation of an employee any amount that represents all or any portion of the tax imposed."

New York policy makers anticipate that employers opting into ECEP will lower employee wages to cover the payroll tax that businesses must pay the state. To circumvent reduced employee pay, the legislature created a new tax credit equal to ECEP's value, cutting the personal income tax for those subject to ECEP.

Charitable funds support health care, education

Contributions to two new charitable funds support health care and education. Taxpayers who itemize can claim fund donations as philanthropic gifts on both state and federal tax returns. Donations to these funds are also eligible for a state tax credit of 85 percent of their value, which taxpayers can claim the following year.

New York's FY 2019 budget also allows school districts and local governments to create charitable funds. Taxpayers contributing to these funds would receive a property tax credit equal to a percentage of the donation.

The state will likely release more details about ECEP and the FY 2019 budget as it continues to implement these changes.