Village Voice, February 2018 (w/Neil deMause)

Will Cuomo Really Save New Yorkers From the GOP Tax Bill?

The plan to save taxpayers $14 billion by replacing income taxes with payroll taxes could end up another of the governor’s failed promises

Last month, Gov. Andrew Cuomo officially announced his plan to counter the federal tax law’s double-taxing of state and local income taxes with a simple gambit: Eliminate New York state income taxes, and instead collect the same amount of money via payroll taxes on employers. Since employees aren’t taxed on money they don’t earn — and employers are still allowed to deduct payroll taxes, even under the new tax law — the Republican attempt to raise taxes for New Yorkers would be undone in one stroke.

It sounds too good to be true — and given Cuomo’s track record of big announcements that he doesn’t always follow through on, there are plenty of grounds for skepticism. We attempted to peer through the fog of budget war to answer your questions (or our questions, really, but we are but your humble servants, dear readers):

Can this cockamamie plan really work?

Probably? According to Center for Economic and Policy Research senior economist Dean Baker — who was one of the first to suggest the payroll-tax strategy in a three-paragraph blog post in December — there’s no legal reason states can’t evade Congress’s tax hikes by simply changing the kinds of taxes they collect.

The repeal of deductibility of state and local taxes — SALT, in tax lingo — came about to help pay for the massive tax cut for the rich that Trump signed into law in December. (The fact that high-tax blue states like New York and California would be hit the hardest was a bonus.) While the final law as passed ratcheted down some on the tax impact — the first $10,000 on income, sales, and property taxes combined could still be deducted — it still could cost New Yorkers an estimated $14 billion a year, according to Cuomo. While much of that would hit the wealthy, who pay the most in state taxes, some economists have worried it would increase pressure for high-tax states to lower their income tax rates, potentially requiring big spending cuts that could take a bite out of services for all residents.

Even before the final bill was signed into law, a group of economists who set out to find loopholes in the tax bill proposed that states could get around the provision by replacing income taxes paid by employees with payroll taxes paid by employers. “Since the tax is levied on the employer,” they wrote, “the employer would still be able to deduct the taxes — even as it would function, in economic terms, very similarly to an income tax imposed directly on the employee.”

“It’s an employer-side payroll tax, so what you expect is that the wages of the worker will fall by the amount of the tax,” explains Baker. “So if the employer’s paying a 5 percent payroll tax on their wages, their wages will fall by 5 percent, but that’s in place of 5 percent they otherwise would be paying in state income taxes.” But because workers’ wages are now lower, so are their federal taxes — so they wind up paying the same in taxes as if the old system of deducting state taxes were still in place.

“I’m 100 percent sure of the legality – you can’t tax people on money they’re not paid,” says Baker. “So that’s 100 percent kosher.”

How would the switchover happen?

While some media outlets have suggested that employers and their workers would have to sit down and renegotiate wages to compensate for the extra payroll tax burden — an exercise that, if you’ve ever been involved in a salary negotiation, sounds like a recipe for disaster repeated millions of times over — Baker says it doesn’t need to be that complicated.

“What I think would make the most sense would be to phase it in over two or three years,” Baker says. That way employers just won’t give out any raises for a couple of years, to allow them to cover their additional payroll tax costs — while workers would see an immediate benefit from the elimination of state income taxes. “It shouldn’t cause a major disruption,” he says.

As for another objection, that replacing a progressive payroll tax with a flat payroll tax would shift the tax burden away from the rich, Baker (who’s been in touch with New York state officials about the plan) would counter that with two measures: a “zero bracket” for low-income workers where earnings wouldn’t be taxed at all; and leaving an income tax surcharge in place for the highest-income New Yorkers. “You could still have an extra 3 percent or whatever you want tacked on above, say, $400,000” — and if they have to double-pay taxes on this money, that’s a rounding error for them anyway.

Will Albany approve this? Albany never approves anything!

Regardless of whether the switch to a payroll tax would work financially for the state, there’s the question of whether the governor can get his proposal through the state legislature and how serious he is about pushing it. Cuomo himself cautioned last month that the tax switcheroo would be “the most difficult challenge that we’ve had to take on because it’s the most complicated, but I have no doubt that this is the fight of New York’s future.” Given the governor’s, uh, sprawling vision laid out in the State of the State earlier this year, no one knows just how high a priority the payroll tax idea will be in upcoming budget negotiations.

A source close to the state Senate Democratic conference told the Voice that the governor hadn’t come to the conference with any details yet, and that they felt his push for the change was a “media-driven strategy.” Given how drastic a change to the tax code this would be and the fact that the state Senate is currently controlled by Republicans who’ve been cool to the idea, this source predicted that Cuomo would end up kicking the proposal down the road, possibly as yet another study.

Still, state senator Liz Krueger, the ranking Democrat on the Senate Finance Committee, tells the Voice that while the proposal was complicated and “a little more academic than what people are used to when making changes in tax policy” — and, for that matter, just one of a number of options Governor Cuomo proposed that were recently studied by the state Department of Taxation and Finance — she believes it has a future.

“If New York State used this as an option, it would be employer- and employee-optional,” she says, noting that an opt-in system was one of the alternatives provided by the state tax department. “If you’re giving it as a voluntary option for the employee to help reduce their tax burden, and the employer might reduce their tax burden, they decide to do it and it’s allowed under federal law, why are we upset about it?”

Is there a way to get this done, if Cuomo wants to?

Krueger sees two ways to push the idea forward politically. One is by continuing to harp on what was already an unequal balance of payments between the state and federal government: According to the Department of Taxation and Finance, New York is sending $48 billion more to the federal government in tax receipts than the state got back in federal spending, and the department says the cap on SALT deductions would add $14 billion to that negative balance. “Would I like to keep that money here instead of sending it to Washington?” Krueger asked. “Yes.”

Krueger also suggested that party affiliations notwithstanding, legislators from Long Island, New York City, Westchester, and Western New York, all counties with high property taxes, could get on board, since their constituents would be hardest hit by the $10,000 SALT deduction cap, which applies to income and property taxes combined. One such Republican legislator, Patrick Gallivan (who represents Erie, Livingston, Monroe, and Wyoming counties in Western New York and sits on the Finance Committee as well), remains skeptical of the payroll tax idea, but tells the Voice he’d heard from constituents who told him they would be negatively affected by the $10,000 cap and that “a responsible legislator should listen to his constituents.” (An Empire Center study from 2016 found that Western New York has the highest effective property tax rates in the state, not counting Nassau County and New York City.)

Gallivan stresses that any change to New York’s tax code should only come after legislators had “all of the facts that are available to us” — which jibes with Krueger’s idea that a payroll tax switch vote could wait until after the budget process.

If the double taxation stays in place, will New York cut state taxes?

That’s certainly the hope of many state Republicans. Gallivan tells the Voice that in his view, “the long-term answer is to continue to try to address high taxes [and] high property taxes and reduce the costs that our citizens and businesses bear.”

That, ultimately, is probably the largest ideological gap for the governor to bridge. Even outside of the larger anti-Trump narrative into which Cuomo’s proposal fits, state legislators have very different views on the role the state’s taxes play. But while state senator (and potential Cuomo gubernatorial challenger) John DeFrancisco has said New York has to focus on giving residents less “free stuff,” Krueger makes a case for the state’s higher taxes as part of why people live here.

“Businesses and people stay here because they want to live in a place with good schools, quality infrastructure, and mass transit,” she says. “The solution of ‘If the federal government is doing this, we just need to lower our taxes’ sounds good as a sound bite, but then you get into the reality of why people live where they do.”