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New York Governor Cuomo Offers Tax Package in Executive Budget

6 min readBy: Liz Malm

New York Governor Andrew Cuomo released his executive budget last week and it includes some suggestions to seriously change some aspects of New York 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. law. These proposals come on the heels of reports issued by the two tax commissions formed by the Governor since December 2012 (see those recommendations here and here). Ultimately, changes hinge on the Governor’s expressed commitment to keep state expenditure growth under 2 percent per year, generating future surpluses.

Here’s everything you need to know about the big tax items in the Governor’s plan. For more information, check out the memo explaining each portion of the legislation, the revenue action section of the budget briefing book, and the economic and revenue outlook. Actual legislation can be found here. Note that all revenue estimates below only include the next five fiscal years.

Many of the proposals are welcomed news—New York is the state that ranks the most poorly on our State Business Tax Climate Index. The package isn't perfect, but there are meaningful elements of simplification, a reduction of the corporate rate, and a reform to the estate taxAn estate tax is imposed on the net value of an individual’s taxable estate, after any exclusions or credits, at the time of death. The tax is paid by the estate itself before assets are distributed to heirs. . Some of these are similar to recommendations we made in December. There is a lot of tinkering with the property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. through other areas of the tax code (mainly the individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. ) that increases complexity. We also would like to see more done to reform or repeal expensive and inefficient business tax incentive programs and see a flatter individual income tax—but this is a start.

The budget contains multiple provisions that would reform the way New York taxes businesses. In particular, it would:

Lower the general corporate franchise tax rate from 7.1 percent to 6.5 percent. (More info on this tax here.)

Total cost of corporate tax items:

  • $205 million in 2015
  • $346 million in each year after that

Merge the bank tax with the corporate franchise tax. Banking corporations file under a separate article of the tax code and this would allow them to file under the general corporate franchise tax (here's a good explainer of the merger, or see this description of how the Bank Tax is currently administered).

Source businesses’ income receipts to the location of its customers (more info on market-based sourcing here).

Governor Cuomo’s plan would make changes to some existing tax incentive programs, expanding many of them. For example, it would:

Extend the tax credit for producing commercials in New York for an additional two years.

Cost: $7 million annually

Expand credit program for builders of low-income housing.

Cost: $8 million annually

Extend the Brownfield Cleanup Program (a tax credit program for cleaning up and developing contaminated properties) for ten additional years, while limiting eligibility requirements. Under this plan, there would be some changes made to what kind of property costs could be claimed and how portions of the credit are administered.

Estimated that this wouldn’t have any revenue impact now and would save money over the long term.

Expand Youth Works Credit program, which incentivizes businesses to hire workers between 16 and 25.

Cost: $4 million annually.

Extend tax exemption for alternative and renewable fuels for an additional two years.

Total cost:

  • $8 million in 2014
  • $16 million each for 2015 and 2016
  • $8 million in 2017

Some items aimed specifically at manufacturers. These would:

Create a refundable tax credit for manufacturers for 20 percent of real property taxes paid.

Cost: $136 million annually.

Lower net income tax to zero percent for qualified upstate manufacturers. The corporate franchise tax has four bases, and taxpayers must calculate all of them and pay that which yields the highest. This provision would lower the rate to zero percent for manufacturers for this base. (Though it seems that firms that have any apportionment percent in the metropolitan district would not be eligible for this benefit.)

Cost: approximately $24 million annually.

Limit existing Investment Tax Credit so that it is only available to manufacturers and agricultural and mining companies engaged in certain research and development activities, in addition to

$65 million annually

Repeal Financial Services Investment Tax Credit

Increase revenues by $30 million annually

Most of the estate tax proposals are exciting and good news for New York’s tax climate:

Increase the exclusion threshold over 5 years to match the federal level. New York’s current exclusion level is $1 million, but the federal one is $5.25 million. It’s easy to have an estate that’s $1 million in New York, where property values are high. A low exclusion threshold can mean the estate tax hits immobile capital, such as family farms or businesses.

Total cost:

  • $33 million in 2014
  • $175 million in 2015
  • $371 million in 2016
  • $612 million in 2017
  • $757 million in 2018

Decrease the top rate from 16 percent to 10 percent over 5 years.

Repeal Generation Skipping Transfer Tax, which doesn’t bring in much revenue or affect many taxpayers.

Require that certain gifts be added back in to calculation of estate.

Changes to the individual income tax would:

Create a new circuit breaker program (in addition to the existing one) for taxpayers making less than $200,000. The higher a homeowner’s property tax liability as a proportion of their income, the larger the benefit. Only homeowners living in a jurisdiction that stays under the 2 percent property tax cap will be eligible.

Total cost:

  • $200 million in 2015
  • $525 million in 2016
  • $1 billion each year after that

Close the “resident trust loophole," which would tax certain trust income that is currently exempted (see this memo page for more explanation, or this explainer with recommendations on trusts from the New York State Bar Association from November).

Revenue impact:

  • additional $75 million in 2014
  • additional $225 million in 2015
  • additional $150 million each year after that

Repeal the add-on minimum tax (AMT) under the individual income tax, which is only paid by approximately 200 taxpayers. Compliance costs are high for a small amount of revenue, so this is a smart move.

Minimal revenue impact

Create a low- and middle-income renter’s individual income tax credit, available to those who meet certain income requirements (phased in over two years).

Total cost:

  • $200 million in its first year
  • $400 each year thereafter

The Governor also proposed freezing property tax rates at 2014 levels for two years. The kicker with this part of the plan is that individuals are only eligible if they live in a jurisdiction that stays under the state’s property tax cap (in year 1) and that jurisdiction also makes consolidation efforts with other jurisdictions (in year 2). The plan is attempting to address the driver of increasing property taxes: local government spending. However, this seems like a difficult and complicated program to administer. Total cost is $400 million in 2014, $976 million in 2015, and $475 million in 2016.

Other minor provisions would greatly simply the code by repealing taxes that have high compliance costs and bring in very little revenue, such as the agricultural cooperatives franchise tax, the Boxing and Wrestling Exhibitions Tax and the Stock Transfer Tax, all of which would have no revenue impact.

Now any tax changes are in the hands of the legislature, who will consider components of the Governor’s tax plan over the coming months.

More on New York here. Follow Liz on Twitter @elizabeth_malm.