New York Should Be Cautious About Governor’s Near-Sighted Budget

New York Governor Kathy Hochul (D) has proposed a balanced 2027 executive budget that avoids taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increases on income, sales, or property taxes. That is great news for New Yorkers. Unfortunately, the proposed budget is also full of policy proposals that threaten the long-run integrity of the state’s finances and harm New Yorker taxpayers.

Budget Balanced with Spending and Revenue Increases

The FY 2027 budget projects total spending at $260 billion, a modest 0.7 percent increase from the revised FY 2026 estimate, with state operating funds rising 5.7 percent to $157.4 billion. This growth is largely concentrated in Medicaid ($38.2 billion, up 11.4 percent) and school aid ($39.3 billion, up 4.3 percent), reflecting ongoing expansions in benefits, enrollment, and reimbursements. Tax receipts, which fund about 80 percent of state operating funds, are forecast at $130.8 billion, up 4.2 percent, buoyed by stronger-than-expected personal income tax collections tied to Wall Street bonuses and wage growth.

The plan closes a projected $4.2 billion FY 2027 general fund gap through a mix of revenue actions and savings, achieving balance on a cash basis. However, it achieves this partly by extending the temporary 7.25 percent top corporate franchise tax rate—applied to businesses with over $5 million in income—through tax year 2029. This measure, originally enacted in FY 2022 and extended in FY 2024, is expected to generate additional revenue for the state and the Metropolitan Transportation Authority (MTA). While this provides short-term fiscal support, it perpetuates New York’s uncompetitive corporate tax environment. Combined with local taxes, specifically those levied in New York City, the effective corporate tax rate approaches 17 percent—the highest in the nation.

NY Budget Provisions Both Conform to and Decouple from OBBBA

Under the budget, New York would adopt state policies that mirror some of the more harmful policies in the One Big Beautiful Bill Act (OBBBA), while decoupling from the OBBBA’s pro-growth provisions. Specifically, the budget would eliminate the state’s income tax on tipped wages—up to $25,000 per year—for single filers earning up to $150,000 and joint filers earning up to $300,000. This measure distorts the state’s tax code and is unlikely to provide much relief to taxpayers or contribute to the state’s tax competitiveness. Though popular, such poorly targeted and arbitrary exemptions for certain kinds of income increase inequity among lower-income workers. For example, two workers of the same income level may have significantly different tax burdens if one relies on tips (such as a waiter or hairdresser), while the other gets paid a flat wage or salary with no avenue for earning tips (such as a teacher or bank teller).

The executive budget proposal would decouple New York State from the federal immediate expensing provisions under IRC § 168(n) and the restoration of full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs. under IRC § 174, as enacted in the OBBBA.

The OBBBA established a 100 percent first-year depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco allowance (special depreciation deduction) for qualified production property—i.e., certain nonresidential real property required for qualified production activities (such as manufacturing)—under new IRC § 168(n).

The governor’s proposal would disallow this special allowance for purposes of the corporate franchise tax, personal income tax, insurance tax, and certain New York City taxes. Instead, applicable depreciation would be computed under the rules of IRC § 167 as in effect prior to the OBBBA. The governor’s plan would also decouple the state and New York City from the OBBBA’s federal accelerated deductions for pre-2025 domestic research and experimental (R&E) expenditures, and the ability to immediately deduct domestic R&E expenses in the year incurred. This implies that all domestic and foreign R&E expenses would be deductible over the same five-year period for state tax purposes. The NYC portion of the tax legislation for businesses would apply only to domestic R&E expenses and would require amortization over a five-year period beginning with the midpoint of the tax year in which the expenditures are incurred. This means that a business operating in New York City would have to calculate taxable income in three different ways. Not only does this add to the compliance burden for taxpayers, but it also erodes the incentive for firms to undertake research in the state.

First-year expensing under § 174 has been part of the federal tax code since 1954, rolling into the tax codes of all conforming states. That policy shifted to five-year amortization in 2022 as a gimmicky pay-for to finance other provisions of the Tax Cuts and Jobs Act. Continued conformity to § 174 is simply a return to longstanding corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. policy for New York, and not a new cost it should avoid.

Excise Taxes Increase in the Budget

While avoiding major increases to broad-based taxes, the governor’s budget includes multiple excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. increases. New York would expand its definition of other tobacco products (OTP) to include modern oral pouches, including the 20 versions of ZYN authorized for sale by the Food and Drug Administration last year. This would apply the OTP tax rate of 75 percent of the wholesale price to all nicotine pouches. The state would also add a $0.55/unit tax on vapor atop the current 20 percent retail tax, combining the complexities of both an ad valorem and an ad quantum tax.

Increases to the modern oral and vaping tax rates run counter to the best practices for alternative tobacco products (ATP). Taxes should reflect relative harm to avoid perverse incentives. Increasing taxes on ATP, which are substantially less harmful than combustible cigarettes, discourages smokers from switching to a less harmful product.

Table 1. Alternative Tobacco Product Tax Rates to Optimize Harm Reduction

Taken together, the governor’s budget reflects a state government attempting to balance its books today, but without addressing important structural reforms needed to maintain its future competitiveness and fiscal sustainability. New York avoids broad‑based tax hikes, but it does so by leaning on temporary revenue patches, expanding narrow and distortionary exemptions, and walking away from federal provisions that would strengthen long‑run investment and innovation. At the same time, higher excise taxes on reduced‑risk nicotine products contradict sound tax policy.

New Yorkers may welcome a balanced budget in the near term, but without a course correction toward a simpler, more neutral, and growth‑oriented tax structure, the state risks deepening the very fiscal and economic challenges it hopes to avoid.

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