NEW YORK’S SALT SOLUTION: PAYROLL TAX HAS TOO MANY PITFALLS, NOT-FOR-PROFIT APPROACH A HOME RUN
By Randy Levine
January 11, 2018
A few months ago, I wrote an open letter to President Trump urging him to reconsider specific aspects of the tax bill, including limitations on deductions for state and local tax deductions (“SALT”). The final legislation did not accomplish what was equitable and fair. What took place was a redistribution of wealth from residents of certain states to those of certain other states. Essentially, a redistribution of wealth was orchestrated by many of the same so called “conservative” legislators who, for years, complained that President Obama was wrong for redistributing wealth. It is now obvious that they believed he was wrong only because the redistribution was done in a way that was not advantageous to those legislators. The incontrovertible fact is that states such as New York, New Jersey and California contribute hundreds of millions of dollars more to the federal government than they receive and that many of those same legislators who supported the new tax law are the ones from the states which receive much more from the federal government then what they contribute to it. The new tax law compounded the following fallacy: That certain states already receiving a disproportionate amount of federal subsidies would be made whole by not having to support those states with high state and local taxes. But the fact is that these recipient states are now receiving an even larger windfall.
There is a way to counteract this inequity. Several weeks ago, I noted a brilliant plan to address the limitations of SALT. I had read a piece in the Washington Examiner which explained how states could set up not-for-profit entities to fund certain services, and taxpayers in those states could thereby designate their state and local taxes to fund those entities. In return, constituents would receive a tax credit for their state income tax that would offset their contribution to the not-for-profit. This vehicle would allow taxpayers to receive under federal law, a charitable deduction. I forwarded that to advisors for Governor Cuomo and Speaker Heastie.
I was therefore pleased to see the Governor’s leadership when he cited this fix in his State Of The State speech. Since then, this idea is being put into action in California and New Jersey, but not yet in New York. Now is the time to do it for New York. There has been discussion of mitigating the SALT limitation by converting income taxes to payroll taxes. This is a theoretical fix, but it has too many pitfalls and problems including existing employment contracts and collective bargaining agreements.
The not-for-profit approach has few pitfalls. Moreover, I have spoken to many distinguished tax lawyers and tax experts and they say that this works. The state would not lose revenue, as funds paid from the not-for-profit would replace those that would have come from the operating and capital budgets to pay for state services. The only loser in this approach would be the federal government and its ability to collect the amount of revenue it thought it would receive by ending the SALT deduction.
There have been some comments from a few that the federal government may try to disallow this vehicle. I say “let them try.” Will conservatives who preach federalism and the necessity of states to govern themselves, now contradict themselves, yet again? In any event, a litigation over this issue will expose sunlight on who really benefits under the new law.
Governor Cuomo, now is the time to move this proposal forward. New Yorkers are behind you. Let’s pass this law, establish the not-for-profit entities and the structures to implement it.
Randy Levine is President of the New York Yankees. These comments are his alone, not the Yankees. He was previously Deputy Mayor for Economic Development, Planning and Administration for the City of New York.