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Questions dog Cuomo tax gambit


Governor Andrew Cuomo has railed and railed against the federal tax overhaul that took effect this month. It's an "all-out direct attack on New York state's economic future," he said during his State of the State address recently.

Cuomo's heavily criticized the law's $10,000 cap on the amount of state income tax and local property tax payments taxpayers can deduct if they itemize their federal returns. And Cuomo says New Yorkers will have to shoulder a bigger tax burden because of that cap.

So Cuomo's floating an idea to game the new law. The state could overhaul its tax code to reduce reliance on personal income taxes and instead adopt a statewide payroll tax system. He tossed the idea out during his State of the State and could include more details in his budget proposal, which he was set to release Tuesday afternoon.

Any new payroll tax would be paid by businesses and would, as the name implies, be based on the amount of employers' payrolls; Cuomo left unaddressed whether the employers would be able to deduct any of that obligation from employee paychecks.

The governor is exploring a switch from income to payroll taxes because businesses can deduct those payments from their federal returns without worrying about a cap. Lawmakers in California and New Jersey have floated similar ideas.

"As Washington has shot an arrow aimed at New York's economic heart, the best plan is to get out of the way before it hits," Cuomo said during his speech.

But Cuomo's idea has since been met with caution and even questions about its plausibility. Spokepersons for Republican Senators Joe Robach and Rich Funke, as well as for Democratic Assembly member Harry Bronson, said they want to see details, and they'll look to see if Cuomo includes any in his budget.

"I think it's feasible and it's worthy of review," says Ron Deutsch, executive director of the Fiscal Policy Institute, a labor-aligned think tank. "That's what we're doing right now.

Deutsch says he commends the governor for trying to creatively address a problem caused by the new tax laws, but his organization wants to make sure any plan doesn't hurt lower-income workers. It also wants to make sure the state would have adequate funds to support critical programs, he says.

Deutsch and E.J. McMahon, a tax expert at the conservative Empire Center think tank, both point out that the state's income tax is progressive – people pay different rates at different income levels – but payroll tax rates are flat.

One way to come at the problem, and keep a progressive tax system in New York, would be to set a base payroll tax and then have an income tax for earnings over a certain amount, Deutsch says.

McMahon is warier. Any attempt to replace the personal income tax with a payroll tax "would be fraught with mind-bending complications and virtually impossible to implement," he wrote in a recent blog post.

The only way to create a payroll tax system that's roughly as progressive as the income tax would be to set rates for different employees that vary by things such as family size or marital status, he writes.

"Businesses (not to mention the state's own tax collectors) would no doubt find this added administrative burden intolerable," McMahon writes. "It's difficult to imagine any state would get far trying to impose such a system."