By Stephanie Kelly
NEW YORK (Reuters) - Companies in New York state are "open to the idea" of moving the state income tax code to a payroll tax system, a senior state official told Reuters on Friday.
Governor Andrew Cuomo earlier this week said the state was exploring using a payroll tax as an alternative to the income tax in order to help residents hurt by new limits on deductions of state taxes from federal returns, under a sweeping overhaul of the U.S. tax code passed in late December.
Cuomo, along with governors of other high-tax states such as California, has railed against the provision of the federal tax overhaul that introduced an annual cap, of $10,000, on the deduction of state and local income and property taxes, known as or SALT. The $10,000 limit, which became effective for the 2018 tax year, will hit many taxpayers in states with high incomes, property values and taxes.
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Paying New York state taxes out of corporate payroll rather than an income tax would help ease the effect on residents of the new cap. New York state residents, however, would still face a $10,000 cap on deductions of local and property taxes.
According to the Cuomo administration official, who spoke on condition of anonymity because the ongoing discussions have not yet been formalized, the chief executives of the largest employers in New York City are willing to consider the move to a payroll tax system.
"Yes, they want to be part of it. They want to be part of how we put it together because their employees are negatively impacted," the official said, giving greater detail for the first time to plans broadly outlined by Cuomo in his 2018 State of the State address on Wednesday.
"Make no mistake, they (Washington) are aiming to hurt us," Cuomo said in his State of the State address. "This could cause people to leave the state of New York. And it could reduce our ability to attract business."
The high-tax states facing the most pain from the new limits on SALT deductions, including New York, New Jersey and California, are generally Democratic leaning.
On Thursday in California a state lawmaker introduced legislation that would allow residents to make donations instead of paying taxes to avoid the cap on deductions of state taxes.
White House economic adviser Gary Cohn said the federal government might try to block attempts to circumvent the cap, Bloomberg reported on Friday.
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CHARITY INSTEAD OF TAXES
Cuomo on Wednesday said he will challenge the new law in court as unconstitutional on the grounds that the first federal double taxation in U.S. history violates states' rights and equal protection.
The New York corporations want to be included in the plan to move to a payroll tax, but the administration source declined to name companies, citing instead the Partnership for New York City, which represents business leaders and employers.
The partnership on Wednesday said in a statement that its members "applaud" the governor's commitment to address the loss of state and local tax deductibility.
Members of the partnership include American Express, Bank of America and BlackRock.
For a tax code restructuring, New York state is also assessing whether to create new opportunities for charitable contributions to support public programs.
The senior official said that, per case law, a contribution to a state and local government for a specific purpose is a charitable contribution.
"So if you want to contribute to a school, a public school specifically, or a not-for-profit that supports a government purpose... you get a tax deduction," the official said. "Or the state can create a charity that also gives to hospitals."
"You can create incentives for people to contribute to charities that would replace some government funding," the official added.
The state will also assess how individuals would build in tax preferences in a new system, the official said.
"But if you just turn yourself into a corp, limited liability corporation, and pay yourself, then you magically are now able to deduct your state and local taxes. We're looking at all of these options."
(Reporting by Stephanie Kelly; Editing by Daniel Bases and Leslie Adler)