January 08, 2018
Dean Baker
The New York Daily News, January 8, 2018
In his State of the State speech, Gov. Cuomo indicated that he does not intend to accept the new Republican tax law — which sharply limits the deductibility of state and local taxes — without a fight. His resistance is commendable, but not all possible responses make sense.
First, he proposed contesting the law in court, arguing that the structure is unfairly discriminating against New York and other states with higher taxes. Second, he suggested the possibility of having the state set up charitable organizations to which people can contribute and get a 100% credit against their state taxes. (Since charitable contributions are still 100% deductible, this would effectively leave the current deductibility of the state’s taxes in place.)
I’m not a lawyer, but these two routes sound rather dubious. The federal tax code is fair and unfair to various people and states in a whole host of ways, and broad-based challenges have rarely succeeded.
The third possibility, replacing part of the income tax with an employer-side payroll tax, has more promise. Since employer-side taxes are deductible for businesses, this would leave in place and actually enhance the deduction for state taxes.
As is, workers are not taxed on their employers’ payments for Social Security and Medicare, nor are they taxed on employer payments for unemployment insurance.
Cuomo and state leaders could consider simply substituting a tax that is deductible on income taxes for a tax on which the Republicans just limited the deduction.
Ordinarily, states should not be trying to game the federal tax code. But this law was explicitly structured to hurt states like New York which have been voting overwhelmingly Democratic in national elections and have relatively high taxes that reflect their commitment to provide better social services to low- and moderate-income people. This shows up in better quality health care and education and more generous income support programs in areas like housing and Temporary Assistance to Needy Families.
In 2017, the TANF benefit for a family of three in New York was $789. By contrast, it was just $170 in Louisiana. In many other southern states, it is not much over $200. Even accounting for differences in living costs, these are radically lower benefits.
Even these more generous benefits are still just over 3% of New York’s state’s budget, but they are indicative of an effort to provide real support for low- and moderate-income people in the state. This commitment is not shared by many Republican-controlled states.
The new Republican tax plan is an effort to make New Yorkers pay a high price for this commitment. By limiting the deduction for state and local taxes to $10,000, it makes many higher-income New Yorkers pay considerably more.
Under the prior tax law, the deduction for state and local taxes effectively meant the federal government picked up almost 40% of the state and local tax burden for higher-income New Yorkers. With the new law, most of these taxes will be coming fully out of the pockets of these higher-income tax payers.
While these are the people who have been the winners in the economy over the last four decades, this will inevitably lead to more pressure to reduce taxes, which will result in lower quality public services for those who need them the most.
The economics on the payroll tax rejiggering Cuomo is exploring are straightforward.
An employer doesn’t care whether she pays money to the worker or the government. If she has to pay a $25,000 payroll tax on a lawyer earning $500,000 a year (roughly the current state income tax), she will cut the worker’s pay by $25,000 to $475,000. This may not happen everywhere, and it may not happen overnight, but over time it is likely to be the outcome.
The reason this is better for the worker is that if they faced $25,000 in state income taxes on a $500,000 salary, under the new law, they would be liable for federal income taxes on the $25,000 they paid to the state. But if their pay were only $475,000, they would not be paying federal taxes on the money that went to the state.
This is a very simple maneuver, and there is little doubt that it is an entirely legal way for the state to circumvent the Republican effort to screw New York. In fact, it has a bonus: Even people who don’t itemize would end up paying lower federal income taxes.
There are complications. If the payroll tax is a flat amount, then there has to be some type of rebate along the lines of an earned income tax credit for lower- and middle-income workers. There also has to be some mechanism for people who work in New York and live in another state and vice versa.
But these problems are not insoluble. We are not looking for a perfect system; we are looking to make the system better than it is under the new Republican tax law.
Cuomo made the right move in saying he plans to fight. The Republicans have given up any pretext of fair play and good government. It would be crazy for the people of New York to act like everything is normal.
