Tax Cuts and Jobs Act Influence on New York State 2018-2019 Budget
On March 30, 2018, New York State Governor Cuomo and state legislators reached an agreement on the New York state 2018-2019 budget, which the governor signed on April 12, 2018. This “Budget Bill” contains significant reform in response to the federal Tax Cuts and Jobs Act of 2017 (TCJA). This state budget legislation will essentially decouple state tax law from the federal tax law and provide state tax relief to individuals impacted by the federal $10,000 limitation on state and local tax deductions.
Some of the key changes associated with the state 2018-2019 budget include:
Employer Compensation Expense Tax - The Budget Bill creates a new employer compensation tax expense which requires those employers that opt-in, to pay a per employee 5% tax on its annual payroll expenses for those employees paid more than $40,000. The progressive personal income tax system will remain in effect; however, a new tax credit equal to the value of the employer compensation expense tax will reduce the personal income tax on wages. The employer compensation expense tax is scheduled to be phased in over 3 years at a rate of 1.5%, 3% and 5% beginning January 1, 2019. The first election for employers who wish to opt-in is December 1, 2018 for the 2019 tax year. Under the new legislation, employers cannot deduct the tax from an employee’s wages, but the legislation does provide a tax credit for employers to offset administrative costs.
Charitable Gifts Trust Fund- The Budget Bill creates a new charitable gifts trust fund that permits taxpayer contributions toward healthcare and education. For taxable years beginning on or after January 1, 2019, taxpayers who make any contributions to these funds can claim a state income tax credit equal to 85% of the amount of the donation for the tax year after the donation was made.Decoupling from certain TCJA provisions - To avoid tax increases, the Budget Bill decouples certain state (NYS) tax laws and city (NYC) administrative code sections from the provisions of the federal tax code, effective January 1, 2018, as follows:
- Allows taxpayers to take an itemized or standard deduction for income tax purposes irrespective of which deduction was claimed at the federal level.
- New provisions relating to alimony payments, qualified moving expense reimbursements and moving expense.
- The Budget Bill expands the definition of “exempt CFC income” to include income that IRC Section 951(a) required to be included in a taxpayer’s federal gross income.
- The Budget Bill adjusts the subtraction modification specific to IRC Section 78 to limit the subtraction to dividends that are not included in the IRC Section 250 deduction.
- The Budget Bill adds a new addition modification for an IRC Section 965(b) deduction.
- The Budget Bill provides for estimated tax penalty relief under certain circumstances for the period on or after January 1, 2017 and before January 1, 2018.
- For calendar quarters beginning on or after January 1, 2019, the law provided for consistent treatment of quarterly employee wage reporting between the Tax Department and the Department of Labor.
- New York part-year residents are required to include the days in NY for any domicile period when calculating the 183-day period for statutory residency.
- NYC personal income tax rates are extended to 2021.
- For taxable years beginning on or after January 1, 2018, the Empire State Child Credit law clarifies that the provision’s reference to IRC Section 24 will have the same meaning as it did before the TCJA.
- Sales tax liability relief for certain minority partners of a limited partnership or members of a limited liability company. Under current law, these persons are held to be strictly liable for unpaid taxes.
- Effective June 1, 2018, sales for resale of food and beverages (including alcoholic beverages) by restaurants and the like are excluded from taxable receipts. In addition, certain veterinary drugs and medicines are exempt from sales tax without requiring a credit or refund of tax on those transactions.
Property Tax - The Budget Bill includes a mandatory STAR income verification program and provisions that a married couple is not permitted a STAR credit on more than one residence during a taxable year unless they are living apart due to a legal separation.Credits - The Budget Bill provides the following:
- The Rehabilitation of Historical Properties is extended to 2025.
- The Musical and Theatrical Production Credit is extended to 2022.
- A tax credit may be provided for contributions made to Health Research Inc., and for certain City University of New York contributions.
- Effective January 1, 2019 state low-income housing credit is amended to hold the taxpayer that first obtained the credit and not the party who the credit was transferred to, solely liable for all the obligations and liabilities pursuant to the credit.
- For the Youth Jobs Program, the bill increases the credits available to employers for tax years beginning on or after January 1, 2018 or 2019.
- Hire a Veteran Tax Credit is extended to 2021.
- Beginning January 1, 2019, a congestion surcharge is imposed on for-hire transportation in the amount of $2.75 ($2.50 for cabs, $.75 for ridesharing) for trips that begin and end in a designated congestion zone. The congestion zone is located south of 96th street in Manhattan.
- Expands the definition of a limousine to include vehicles that hold between 15-20 persons.
- Authorized the Commissioner of Taxation and Finance to share with the comptroller fixed and final unwarranted debt information to permit the use of unclaimed funds to pay those debts.
What Does CohnReznick Think?
The New York budget bill contains several provisions addressing the recent federal tax reform. Perhaps the most interesting provision is the “Employer Compensation Expense Tax” which is an optional employer-level payroll tax. We must wait and see how much revenue New York collects from this tax as it is an increased cost on New York employers. Also, while New York was an early and vocal leader in the move toward states attempting to counteract the impact of federal tax reform, we expect that several other states may also seek to lessen the impact of federal tax reform on their residents through state law changes. In addition, it’s not yet clear how the IRS or U.S. Treasury may view all of New York’s changes. Stay tuned.
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