January 27, 2021
New York budget proposal includes a new wealth tax surcharge and suspension for tax year 2021 of the phase-in of the middle-class income tax cut
New York Governor Andrew Cuomo released two versions of his fiscal year (FY) 2022 budget proposal on January 19, 2021, the first of which calls for an increase in personal income taxes for high income earners and suspension of the phase-in of the middle-class income tax cut that began in 2018. The second version of his budget proposal, which would not include these income tax increases, assumes that Congress will grant the governor's request for $15 billion in state aid. At the time of the governor's release, the state anticipated receipt of only $6 billion, which the governor states will be insufficient to avert increases in the state's personal income tax.
Proposed personal income tax hike
Under the proposal that includes the hike in the personal income tax rates, high-income earners would see a new temporary high-income surcharge. According to the FY 2022 budget briefing book, new surcharge rates effective for tax years 2021 through 2023 would go into effect on taxable income above $5 million. The current top personal income tax rate is 8.82% for married taxpayers with taxable income above $2,155,350. The budget proposal would increase the New York State top income tax rate to 10.86%. New York City's high-income taxpayers would see an increase in their top combined tax rate to 14.7%. Taxpayers would have the option of prepaying the additional surcharge for tax years 2022 and 2023 through tax year 2021 estimated payments. Taxpayers that take this option could receive repayment of the advance payment via tax deductions in tax years 2024 and 2025.
The proposal would also pause the phase-in of the middle-class tax cut, which began in 2018 and is currently scheduled to fully phase in by 2025. Rather than continue the tax cut for 2021, income tax rates would revert to the tax year 2020 income tax rates for just 2021, with the tax cuts resuming in years 2022 through 2026. (See EY Tax Alert 2020-2920, 12-22-2020, for more on how the tax cut is currently affecting 2021 state income tax withholding.)
It is not clear whether employers would be required to withhold at the higher top income tax rate. According to the proposed budget bill language, high earners would pay the new surcharge when they file their 2021—2023 state income tax returns or, at their option, pay the increased taxes through estimated tax payments. If the middle-class income tax cut is suspended for tax year 2021, revised income tax withholding tables would need to be released by the New York Department of Taxation & Finance.
The governor continues to call for the repeal of the cap on federal income tax deductions for state and local tax instituted under the 2017 Tax Cuts and Jobs Act, which he states cost New Yorkers over $30 billion over the past three years.
Ernst & Young LLP insights
The state legislature is up against a time crunch because New York's constitution requires that a new budget be approved each year by April 1.
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