New York State Has a Legal Workaround on Limits on State and Local Tax Deductions

28th February 2019 Off By binary
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That would have been worth mentioning in a New York Times piece on how the limits are hitting upper middle class and rich taxpayers in liberal states like New York and California. The tax law pushed through by Trump and the Republican Congress in 2017 was quite explicitly designed to make it more difficult for liberal states to raise revenue for purposes like providing health care and quality education.

It did this by limiting the amount of state and local tax that people could deduct from their federal taxes. While previously these taxes were fully deductible from federal taxes, which meant that the federal government was effectively picking up the tab on between 25 percent and 40 percent of state and local taxes, after the change the taxpayer has to pick up 100 percent, once the limit is reached.

However, New York’s governor, Andrew Cuomo, put in place a partial workaround on this limit. He pushed a bill through the state’s legislature that partially replaces the state’s income tax with a voluntary payroll tax on employers of 5.0 percent. A payroll tax paid by employers is not subject to income taxes. (Economists usually assume that payroll taxes come out of wages.)

The law reduces a worker’s state income tax dollar for dollar for money paid in the payroll tax on their behalf. This move effectively preserves the deductibility of the state income tax, at least for people who get most of their income in wages.

Contrary to what is implied in the NYT piece, Cuomo’s workaround has not been ruled illegal. It is being phased in, so only 1.0 percent of income tax could be shielded in this way in 2018, but that rises to 3.0 percent this year, and 5.0 percent in 2020.

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