February 20, 2018 New York Governor Cuomo proposes optional payroll expense tax to protect state taxpayers from federal income tax increases under the Tax Cuts and Jobs Act Governor Cuomo announced that the fiscal year 2019 30-day Amendments to the Executive Budget includes a provision allowing employers to opt into a new Employer Compensation Expense Tax (ECET) that would protect New York individual taxpayers from increased federal income taxes resulting from the $10,000 cap on state and local income tax (SALT) deductions under the Tax Cuts and Jobs Act (TCJA). A new individual income tax credit would be applied against the New York personal income tax on wages with the advantage that individual taxpayers whose employers opt into the ECET would not experience a decline in take-home pay. A new tax credit would also be available to employers to offset their administrative costs.1 (Governor Cuomo press release, February 12, 2018.) The Executive Budget bill, now including the ECET provision, will become part of the budget negotiations among the Governor, the Senate and the Assembly. Background Effective January 1, 2018 and through December 31, 2025, the TCJA allows an individual taxpayer to claim a deduction for state, local or foreign property or sales taxes only when the taxes were paid or accrued in carrying on a trade or business or an activity described in IRC Section 212 (expenses incurred for the production of income). The TCJA generally limits the ability of individual taxpayers to deduct their state or local income taxes, war profits or excess profits tax. Individual taxpayers can claim an itemized deduction of up to $10,000 ($5,000 if married filing separately) for the aggregate amount of state and local property tax, war profits, excess profits tax and income tax or sales taxes.2 (Ernst & Young LLP Tax news update, December 20, 2017.) It was estimated that absent changes to New York's tax code, the TCJA's limitations on the federal deductibility of SALT will cost New York's taxpayers an additional $14.3 billion per year and "risk undermining the progressivity of New York's tax system, the investments and services that the state provides for its residents, and the competitiveness of New York's economy over the long term." (New York State Department of Taxation and Finance-Preliminary Report on the Federal Tax Cuts and Jobs Act, January 23, 2018.) Proposed optional ECET would reverse impact of lost federal SALT deductions For those New York individual taxpayers facing an increase in their federal income tax as a result of the $10,000 cap on SALT deductions, Governor Cuomo proposes implementing a voluntary program under new Article 24 whereby employers can opt into the ECET. At a high level, as proposed in the 30 day amendments, employees of a participating employer receive a tax credit against their New York income tax. The intended result is a revenue neutral program that shields employees from the adverse impact of the TCJA's SALT deduction limitation. Following is a recap of the current proposal. — Electing employer. An electing employer for purposes of the ECET would be one who is required New York Tax Law Section 671 to withhold New York income tax from wages and has made the election to be subject to the ECET. — Covered employee. Covered employees are those who are employed by an electing employer, who are required to have amounts withheld under NY Tax Law Section 671 and who receive annual wages and compensation from their employers of more than $40,000 annually. — Covered wages. Covered wages on which the ECET would be based are defined in IRC Section 3121 and IRC Section 3231 (Medicare wages). — How employers opt in. The employer election to opt into the ECET would be made by (1) unanimous consent of all owners at the time of the election if the employer is not a corporation, (2) by any officer or manager of the employer who is authorized under the law or organizational documents to make such election if a for-profit or not-for-profit corporation, (3) by all trustees if the employer is a trust, or (4) by the chief executive officer of such governmental entity if the employer is a governmental entity. The election would be made by October 1 of the calendar year to be effective for the immediately succeeding calendar year, but if the election is made after October 1 of the calendar year it would be effective for the 2nd succeeding calendar year. — ECET tax rate. The ECET would be imposed on the payroll expense (covered wages) paid by the electing employers to covered employees at a rate of 1.5% of the payroll expense paid during each calendar quarter for 2019, 3% of the payroll expense paid during each calendar quarter for 2020, and 5% of the payroll expense paid during each calendar quarter for 2021 and thereafter. The electing employer would only be subject to tax on the payroll expense paid to any covered employee during the calendar year in excess of $40,000. — No deduction from wages allowed. An employer would not be allowed to deduct from wages or compensation of an employee any amount that represents all or any portion of the ECET. — Payment of the ECET. The ECET would be required to be paid at the same time the electing employer is required to remit payments under NY Tax Law Section 674 (withholdings on payroll), with certain exceptions. In addition, the proposal provides for joint and several liability for certain responsible persons, including any officer, director, or employee of a corporation or of a dissolved corporation who is under a duty to act for such corporation in complying with any requirement of ECET provision, among others. The commissioner may require that all filings of ECET forms or returns be filed electronically and all payments of the ECET tax be paid electronically. The commissioner would also prescribe the methods of quarterly filings by electing employers, including, but not limited to, the inclusion of specific employee-level detail. — New York state income tax credit for individuals. NY Tax Law Section 606 would be amended to add a new subsection that includes the calculation of the New York state income tax credit available to employees of ECET participating employees. For 2019, the credit would be equal to the product of (1) the covered employee's wages and compensation in excess of $40,000 received during the tax year from an electing employer3 (2) 1.5% and (3) the result of one minus a fraction, the numerator of which is the tax imposed on the covered employee as determined under NY Tax Law Section 601 before the application of any credits for the applicable tax year and the denominator is the covered employee's taxable income under Article 22 for the applicable tax year. For 2020, the same formula would apply but substitutes 3% for 1.5%. For 2021 and thereafter, the same formula would apply but substitutes 5% for 3%. If the credit exceeds the taxpayer's tax for the tax year, the excess would be allowed to be carried over to the following tax year or years, with no carryover limitation. Ernst & Young LLP insights The ECET is included in Part MM of S.7509-A/A.9509-A, as amended on February 15, 2018 via Governor Cuomo's 30-day amendments to the fiscal year 2019 Executive Budget. The Executive Budget bill, now including the ECET provisions, will become part of the budget negotiations among the Governor, the Senate and the Assembly. Because New York State's 2019 fiscal year begins on April 1, 2018, the goal of these negotiations is, in general, to finalize a budget agreement on or before March 31, 2018. Therefore, until a budget agreement is reached and a bill is enacted that includes the ECET, the fate of the ECET is uncertain. We will provide updates as further developments unfold. ———————————————
——————————————— 1 While the Governor's press release refers to an employer credit for administrative costs, there is no provision in the 30-day amendments that refers to such credit. 2 In determining whether a tax is an "income tax" — taxpayers should not simply look to whether income, either gross or net, is used as the measure of taxation; instead, taxpayers must look to the purpose and application of the tax at issue. In any event, it appears that state and local taxes that are non-itemized deductions, but yet are imposed on businesses and individuals (such as the New York City Unincorporated Business Tax and the Metropolitan Commuter Transportation Mobility Tax) would probably remain deductible because they never were taxes described in IRC Section 164(a)(3). 3 Note that the 30 day amendments refer to a "covered employer" in the provision computing the credit whereas the ECET refer to "electing corporation." We have assumed for purposes of this Alert that the terms "covered employer" and "electing employer" have the same meaning when computing the credit. ——————————————— EY Payroll News Flash
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