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Noonan’s Notes Blog is written by a team of Hodgson Russ tax attorneys led by the blog’s namesake, Tim Noonan. Noonan’s Notes Blog regularly provides analysis of and commentary on developments in the world of New York and multistate tax law. Noonan's Notes Blog is a winner of CreditDonkey's Best Tax Blogs Award 2017.

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New York’s SALT “Workarounds” Not Really Working

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Now in the heart of tax season, we are reminded about many of New York’s tax credits and deductions still available to taxpayers despite federal deductions being eliminated with the passage of the Tax Cuts and Jobs Act (TCJA) in December 2017. Over the past year, there has been a flurry of activity as New York legislative bodies and federal regulations drafters have offered up various SALT “workarounds,” to deal with the $10,000 SALT cap.  But recent reporting out of the New York budget office (from New York State Comptroller Thomas P. DiNapoli’s February 27 report on the proposed executive fiscal budget for 2020 (the “Report”) (see page 25-26)) suggests that these workarounds aren’t really working.  

Here’s a snapshot of how things unfolded last year with the SALT workarounds in New York State: On March 30, 2018, the New York State Legislature approved Gov. Andrew Cuomo’s proposals to create the nation’s first SALT cap workarounds. The SALT workaround provision created two new charitable contribution funds, one for healthcare and one for education. Donors were to receive a state tax credit of up to 85% of their contributions, partially circumventing the $10,000 SALT deduction cap. Local entities like counties, cities, and towns could also create charitable contribution funds and allow donors to receive a local property tax credit of up to 95 percent of their contributions. We wrote about all this here and here.

Then on August 23, 2018, the IRS proposed  REG-112176-18 to put an end to the states’ plans. In short, the IRS’s proposed regulations were designed to prevent these types of workarounds for any contributions after August 27, 2018.  On August 24, 2018, the day after the proposed regulations were issued, New York State Governor Andrew Cuomo issued a public notice entitled, “Governor Cuomo Alerts New Yorkers to Deadline to Make Charitable Donations Before Politically Motivated IRS Regulations Take Effect” which I wrote about here. I also noted that the New York State Department of Taxation and Finance encouraged New York residents to take advantage of the deduction on its website.

Through New York’s other SALT workaround, known as the state’s Employers Compensation Expense Tax (“ECET”), employers that opt in will pay a payroll tax on employees’ annual wages of $40,000 or more, and employees will receive a tax credit corresponding in value to the payroll tax paid. The tax is phased in over three years beginning January 1, 2019. Apparently, though, only 262 businesses (many small partnerships) opted into this voluntary payroll tax system designed to mitigate tax increases, the Report further added, citing data from the New York Division of Budget.  

The charitable workarounds had some more success, at least early on. According to the Report, contributions to New York’s charitable gift trust funds for healthcare and public education will total $93.4 million this (2019) fiscal year. However, for fiscal 2020, the executive budget “projects less than $2 million in donations due to uncertainty” of the federal proposed rules to SALT workarounds. That’s a 98% decrease, and suggests that this is a workaround that will go the way of the ECET, i.e., not really anyone will be using it.

This is bad news for both the State and its taxpayers. Facing the state’s “most serious revenue shock” in years as a result of the SALT deduction cap, according to New York State Comptroller DiNapoli when he and Governor Cuomo delivered an Update on State Revenues and the Impact of SALT, New York has already seen a roughly $2.3 billion drop in revenues. There has been ongoing speculation since November 2018 whether the new Congress will enact legislation to remove the SALT cap, but for now we’re stuck with the reality that this is everyone’s best (and really only) hope. The proposed “work-arounds” are a misnomer—they simply aren’t working.

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