By midnight Monday, more than 9 million New Yorkers will have filed their income tax returns for 2018. And most will then have cause to wonder what the Great New York SALT Panic of 2018 was all about.
Gov. Andrew Cuomo portrayed President Trump’s tax reform and its $10,000 cap on state and local tax deductions as a disaster for the Empire State — “an all-out direct attack on New York’s future” that would effectively raise state and local taxes on middle-class families by 25 percent, as Cuomo predicted in January 2018.
In the months that followed, the governor would frequently repeat the 25 percent tax-hike warning, often adding the claim that residents of downstate suburbs would face an average tax hike of $6,400.
All of this was grossly misleading, to say the least, as New Yorkers are now realizing. In fact, despite the SALT cap, the vast majority paid lower taxes for 2018 than they would have under the previous federal law.
Families in New York’s economically struggling upstate regions — where typical households most closely match the middle-American profile congressional Republicans were aiming to help most — pocketed the biggest tax cuts.
Even in New York’s more affluent downstate suburbs, middle-class families are learning — to their surprise, if they believed the governor — that the new tax law isn’t costing them after all.
For most New Yorkers, lower federal tax rates, a much larger standard deduction, a vastly expanded child credit and a rollback of the Alternative Minimum Tax have offset the SALT cap.
Judging by publicly released details of his 2017 return, Cuomo himself may have saved nearly $10,000 for 2018.
But if the new federal tax law is a low-SALT nothingburger for most New Yorkers, it remains a threat to the state’s finances. That’s because the big losers from the SALT cap are concentrated among the Empire State’s highest-earning residents, the 1-percenters who generate more than 40 percent of the state’s personal-income tax as well as an outsized share of New York City taxes.
Paradoxically, even as the governor bemoans the impact of the SALT cap on New York’s wealthiest households, Cuomo’s new budget just extended for half a decade a supposedly temporary surtax that slams the highest earners, for an extra $4.5 billion a year.
Cuomo had to have those taxpayers uppermost in mind last year when he engineered several budget provisions designed to thwart the SALT cap, including the establishment of government-sponsored “charitable-contribution funds” benefitting public education or health care.
The idea was that New Yorkers could claim a federal charitable deduction for giving to the funds, linked to a state income-tax credit restoring most of their lost SALT deduction. Unsurprisingly, however, the Internal Revenue Service issued a rule rejecting the ploy, leaving Cuomo to fight the agency in federal court.
The governor also promised to “thwart” the feds with an optional payroll tax that would shift a portion of the income tax burden from individuals to employers, who can still deduct salaries as a business expense against federal taxes. But that tax has proved to be so complicated and unappealing that hardly anyone has opted into it.
Last but not least, the state’s third promised SALT workaround was a version of the payroll tax for unincorporated firms, whose profits flow to the individual tax returns of their owners and partners. This would have appealed to the wealthy professionals and Wall Street investors who are among New York’s biggest taxpayers — and biggest federal SALT deduction losers.
But nothing beyond a “discussion draft” of the unincorporated-business tax has emerged from the state’s tax agency, suggesting that the concept is simply too impractical to implement.
Cuomo can’t be faulted for attempting to limit the impact of the SALT cap. But he clearly exaggerated the likelihood that his workarounds would actually, well, work, even as he grossly exaggerated the negative impact of the new federal tax law on most New Yorkers.
This Tax Day, most middle-class New Yorkers are realizing two levels of income tax relief — from Washington and Albany, thanks to an ongoing reduction in state-income taxes on incomes as high as $323,000, which was enacted in 2016 and is due for full implementation in 2024.
The question remains how much longer the richest New Yorkers will keep on footing the state’s and the Big Apple’s bills.
E.J. McMahon is research director at the Empire Center for Public Policy and a Manhattan Institute adjunct fellow.