New York State approved a fiscal year 2019 budget that contains provisions to lessen the impact of the new limitations on state and local tax deductions under the Tax Cuts and Jobs Act that Republicans in Congress passed last December.

The new tax law limits itemized deductions for state and local income, property and sales taxes for individuals to $10,000 a year, while doubling the size of the standard deduction. The federal tax law change signed by President Trump last December is expected to have a massive impact on taxpayers in so-called “blue” states led by Democrats like New York, New Jersey and California where taxes are often high and many taxpayers who itemize claim the state and local tax, or SALT, deduction.

“The federal attack on our economy through the tax code, which I hope by now all of you know, the federal tax code had a provision that would eliminate the deductibility of state and local taxes, hence the acronym SALT,” said New York Governor Andrew Cuomo, in announcing the budget deal Friday evening. “We had to restructure our tax code to avoid the attack. They launched a missile. We were standing in the target zone of the missile because of our tax code. Our state taxes and our property taxes, we literally had to flee the zone we were in and change the state tax code so it no longer applied and we had to get it done before the missile hit: after launch, but before strike. And that's what this tax code change attempts to do.”

New York Governor Andrew Cuomo
New York Governor Andrew Cuomo Daniel Acker/Bloomberg

New York is the first of the blue states to actually pass a change in its tax laws, giving taxpayers a way to make their tax payments through a new payroll tax system or a charitable fund. The new federal tax law doesn’t impose limits on either payroll taxes or the charitable deduction.

Under the changes, employers in New York State would be able to opt-in to a new voluntary payroll tax system, known as the Employer Compensation Expense Program, or ECEP. Businesses that opt in would be subject to a 5 percent tax on all annual payroll expenses in excess of $40,000 per employee, phased in over three years beginning on Jan. 1, 2019. The current personal income tax system would remain in place, and a new tax credit corresponding in value to the ECEP would cut the personal income tax on wages and ensure that state filers subject to the ECEP would not experience a decline in take-home pay.

The budget also sets up two new state-run charitable contribution funds to replace property taxes where taxpayers can pay money to support health care and education. Donations to these funds would provide a reduction in local property taxes via a local credit equal to a percentage of the donation.

“We went from an income tax primarily to a payroll tax,” said Cuomo. “Property taxes move to a charitable donation tax. Again, it's optional. Some employers will do it, some local governments will do it, but it's our best attempt to avoid the federal assault. The real answer is to repeal SALT. That's what has to be done. That has to be done in Washington. I think that should be the priority for any congressional member who says they represent the State of New York because this provision hurts every New Yorker, period. There's a cap that they say it protects over the $10,000 cap. It's baloney. This hurts the state, it hurts the state economy. The ultimate solution is repeal, and I'll be talking about that through the November elections. But in the meantime, get out of the way of the missile is always good advice in life as well as in tax policy.”

Treasury Secretary Steven Mnuchin has already expressed skepticism about whether such workarounds would be allowed by the Internal Revenue Service, however. In January he called the effort to transform property taxes into charitable contributions “ridiculous” (see Trump’s SALT ‘war revisited: Most blue staters will get tax cut).

“I hope that the states are more focused on cutting their budgets and giving tax cuts to their people and their states than they are on trying to evade the law,” he said.

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