Jeff Stein's Wonkblog piece might have misled readers about the complexity of New York's new employer-side payroll tax as a workaround for Republican tax bill's limit on the deduction for state and local taxes. The piece told readers:
"'Employers can’t just slash salaries willy-nilly, even if there’s a good argument for it being to the employees’ benefit,' wrote Jared Walczak of the Tax Foundation, a right-leaning think tank. 'It might be an option for small groups of highly-compensated employees — think hedge funds and consultancies — but it’s a tough sell for a larger operation with a more diverse workforce.'"
While the logic is that an employer-side payroll tax reduces wages by a roughly equal amount, the one put forward by Governor Cuomo is unlikely to result in anyone getting a pay cut. The tax is phased in at a rate of 1 percent in 2018, and then 2 percent in both 2019 and 2020. Wages are rising an average of 2.5 percent annually. This is an average for all workers, the pay for workers who stay at the same employer is rising by more than 3.0 percent annually.
This means that workers at employers paying the tax are likely to see smaller wage gains rather than actual cuts. The Cuomo administration was quite conscious of this issue in designing the tax. (I had some discussions with Cuomo's staff on the tax plan.)
While this plan has been described as too complicated it is much simpler than the Flexible Savings Account (FSA), which have proven very popular with employees. These accounts require lots of bookkeeping and also put workers at risk of losing unspent money. By contrast, the employer-side payroll tax is simply a one-time adjustment to workers' pay.
It also allows for much larger potential savings than an FSA. A person earning $200,000 a year can save more than $3,000 a year on their taxes if their employer takes advantage of the employer-side payroll tax option. This is about four times as much as the maximum they can save on an FSA.