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Cuomo and New York State Take the Lead in Fighting Back Against Republican Tax Plan

One of the major changes in the Republican tax plan that became law at the end of last year was a limit of $10,000 on the deduction for state and local income taxes. This was explicitly designed as an attack on liberal states like California and New York, which provide relatively high quality services for their residents, and therefore have higher taxes. Many Republicans openly boasted that these states would face pressure to reduce their taxes, and therefore also cut funding in areas like education and health care, if state and local taxes were not deductible for all of their residents.

Republicans may exaggerate the effect of imposing a higher tax burden on these states. (For those keeping score, there was already a net outflow of money from states that tend to vote Democratic to those that vote Republican.) However, there is no doubt that it is harder for state and local government to raise revenue in a context where state and local taxes are not fully deductible than in a context where they are. In other words, Republicans are absolutely right in believing that they are hurting the finances of liberal states.

There have been various plans put forward to counter the Republican tax plan, but New York’s governor, Andrew Cuomo, is taking the lead with his proposal for an employer-side payroll tax that will substitute for a portion of the state income tax. This is a way to preserve the deductibility of a substantial portion of the tax revenue the state raises.

Cuomo proposes to have a 5 percent payroll tax on wage incomes in excess of $40,000. This tax would be phased in over a three-year period. It would also be voluntary so that companies did not want to go this route would not be required. Workers at companies that did go the payroll tax route would be subject to a different tax schedule that took account of the payroll tax paid by their employer.

CEPR / February 12, 2018