New York state will challenge the federal government’s new tax law as unconstitutional “double taxation,” Gov. Andrew M. Cuomo (D) said in his State of the State speech to the Legislature.
The law’s limitation on the state and local tax deduction violates the due process and state’s rights provisions of the Constitution, Cuomo said in his speech Wednesday. Several leading tax attorneys have told Bloomberg Tax, however, that neither the U.S. Constitution nor Supreme Court case law prevents Congress from acting as it did to limit the deduction.
The governor also said he is looking at “a major shift” in state tax law to reduce New York’s reliance on the personal income tax. Among the options he is looking at: creation of a statewide payroll tax system, creation of new charitable organizations, and elimination of the carried interest tax break used by private equity.
Cuomo has said he will announce the details of the tax overhaul when he presents his 2018-19 budget.
“It’s not going to be easy,” Cuomo said. “It is going to be complicated. We have no choice. If we do not fix this problem, it is a question of the State of New York’s economic viability long term.”
The federal tax law (Pub. L. No. 115-97), signed Dec. 22 by President Donald Trump, allows taxpayers to deduct up to $10,000 of property taxes and state and local income or sales taxes. There was previously no limit on the amount of state and local taxes that could be deducted.
Cuomo said he would launch his own version of a “repeal-and-replace” campaign.
The Democratic speaker of the state Assembly and the Republican majority leader of the state Senate have both indicated support for mitigating the impact of the federal tax bill, but neither has announced any specific plans.
“The idea of replacing all or part of the state PIT with a payroll tax, partially subsidized by the federal government via business tax deductions, might sound plausible or even appealing on the surface to politicians worried about the impact on their revenue cash cows,” E.J. McMahon, research director of the conservative-leaning Empire Center for Public Policy, said on the center’s blog.
“But on closer inspection, even taken on its own terms, the payroll tax idea is not nearly as simple as it sounds. In fact, any attempt to broadly displace the PIT with a payroll tax would be fraught with mind-bending complications and virtually impossible to implement,” he said.
“In the final analysis, any attempt by New York’s state leaders to adjust for or offset the loss of SALT through the creation of new, supposedly ‘deductible’ taxes is unlikely to be worth the effort and distraction,” according to McMahon.
Leah Robinson, an attorney at Mayer Brown LLP, told Bloomberg Tax “the governor’s plan to help his citizens find relief from the new federal state and local tax deduction limitation is encouraging.”
“The ideas are creative and exciting and—as a state tax wonk—I’m absolutely intrigued and cannot wait to see where these initiatives go,” she said in an email.
Jennifer S. White, an attorney with Reed Smith LLP, told Bloomberg Tax that Cuomo has shown “a real initiative to try and do something to help New Yorkers recover from the loss of the state and local tax deduction.”
“I think that that’s a good thing,” she said. “What exactly it looks like, I think it’s a little soon.”