Brief: New York State’s Continuing Tax Reform: governor’s unincorporated business income tax proposal

July 16, 2018.The State of New York continues to evaluate possible adjustments to its tax system in response to the federal Tax Cuts and Jobs Act of 2017 (TCJA). Governor Cuomo proposed the idea of a statewide unincorporated business income tax (UBT) in early 2018. Perhaps due to the complexity involved, the UBT did not make it into the state budget package along with the other response measures: a payroll tax workaround, decoupling of rules for itemized deductions and other state tax rules from the federal tax code, and a mechanism to allow charitable contributions to substitute for taxes.

Similar to the measures passed, the main point of the proposed unincorporated business tax is to maintain federal tax deductibility for some New York taxpayers. The taxpayers in question are mainly those who may be negatively affected by the new $10,000 cap on state and local tax deductions (SALT) brought about by the new federal tax law. The UBT in the governor’s proposal is intended to provide relief to the earners of nonwage income who receive income via pass- through unincorporated entities such as LLCs and partnerships. The Fiscal Policy Institute is pleased to have a formal opportunity to offer some comments on the matter as we view a meaningful state tax reform as a both necessary and desirable response to the TCJA.

FPI’s suggestions

  • Improve public input process: form a tax reform commission and hold hearings;
  • The state tax reform must take into account the composition of new winners and losersdue to the TCJA and resulting changes in the economy and taxpayer behavior;
  • UBT scheme should start as an optional system until there is clarity about its effect;
  • UBT should be above 5 percent to be attractive to taxpayers with lower incomes;
  • PIT credit should be set below the usual 93 percent at higher incomes; The Fiscal PolicyInstitute suggests setting the PIT credit at a lower percentage would contribute to increasing progressiveness of the state’s income tax structure and would generate additional revenue.
  • S corporations should be included;
  • Real estate firms are expected to benefit greatly as a result of TCJA and should be subject to the new UBT, but their owners should only be allowed to claim a UBT-based PIT credit below 93 percent. The FPI suggests setting the credit at a level where a considerable recapture of the windfall gains due to TCJA can be secured.

To read the full brief please click here.

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