GS Goldman Sachs Group Inc

By Richard Rubin and Mike Vilensky 

New York state lawmakers found a clever way for employers to help their workers circumvent a new $10,000 federal cap on state and local tax deductions. Employers, however, so far aren't crazy about it.

The idea, which became law last month, creates a new optional payroll tax that shifts the state and local tax deduction from individuals who can no longer fully take it to businesses that can. Employers are worried about compliance costs, interactions with union contracts, complexity across state lines and the difficulty of explaining to workers how a plan that might lead to smaller pay raises still puts more money in their pockets.

"It's a creative approach by the governor's office, and I give them credit for thinking through issues," said Peter Faber, a tax lawyer at McDermott Will & Emery LLP in New York who advises large corporations. "As my clients consider the practical realities of implementing the scheme, they are concerned."

The Wall Street Journal asked the 10 largest private employers in the state and in New York City, along with all Fortune 100 companies based in New York state, whether they would opt for the new payroll tax. None that responded said they would do so, though they have until Dec. 1 to make a decision for 2019.

The state and New York City are still determining whether to use the new payroll tax for their own employees.

That caution is an indication that some of the most imaginative ways of working around the new tax law's restrictions may be tricky to implement on a large scale.

The new payroll tax is part of the state's response to last year's federal tax law, which capped at $10,000 the amount of state and local tax payments that individuals could deduct from income on their federal tax forms.

In part because of that new cap, 8.3% of New York households will get a federal tax increase in 2018 averaging $3,340, compared with 6.3% nationally, according to the Tax Policy Center, a Washington group led by an Obama administration official.

Gov. Andrew Cuomo and state lawmakers r esponded with the new state payroll tax, which employers who choose to participate will pay on behalf of their workers. The state will count these payments toward state income taxes owed by the workers.

The advantage: Employers can deduct these payments for federal tax purposes, which individuals are now limited in doing.

But there's a catch. Employers would likely recover the cost of paying the state taxes on behalf of employees by holding down their salaries.

The net effect of the tax changes would be less pretax income for workers, but lower federal taxes and more after-tax income.

The optional payroll tax starts at 1.5% of wages above $40,000 in 2019 and rises to 5% by 2021, below the state's top individual income-tax rate. The phase-in is designed to give employers and workers time to adapt without sudden cuts in wages. At the 5% rate, a single employee making about $100,000 would save more than $700, said Daniel Hemel, a University of Chicago law professor who helped develop and promote the payroll tax idea. Today, that employee pays at least $2,850 in New York state taxes. The employee would be better off if his employer pays the $2,850 state tax and his federal income and payroll taxes are based on a $97,000 salary.

The Internal Revenue Service could challenge the novel approach, though many legal experts believe it complies with federal law.

Even if the IRS doesn't challenge it, many businesses are wary.

"How do you articulate that somebody in New York is getting a smaller raise than someone in Florida who is doing the same job?" said David Pope, a tax lawyer at the law firm Baker McKenzie. "It becomes very complex very quickly."

Pretax income, what people think of as their salary, is important. It determines future Social Security benefits and can affect 401(k) matching contributions, employees' share of health-care premiums and the starting point for job negotiations.

"There is interest in mitigating the impacts of the federal tax law, so employers are looking at how they might take advantage of these new provisions," said Kathryn Wylde, director of the Partnership for New York City, a business association. "At the same time, there are concerns about how the Treasury and IRS will look at them and what happens if you have employees in other states."

Large New York employers, including Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc., Verizon Communications Inc. and Wegmans Food Markets Inc., declined to comment. Time Warner Inc. said it hasn't made a decision. American Airlines Inc., which has 8,000 New York employees, is analyzing the law and "assessing the appropriate course of action," spokeswoman Sarah Jantz said in an email.

Smaller businesses full of tax-savvy, high-income professionals might be more likely to participate, because they're less likely to encounter the same challenges with employee communications and parity with employees in other states. Employers' choices over the next few years will determine whether the new state law benefits just the best-off New Yorkers or a larger group.

"It's going to take time for people to understand it and get comfortable with it," said Robert Mujica, Mr. Cuomo's budget director. He added that the state will soon put out guidance for employers and talk to neighboring states about starting reciprocal programs.

(END) Dow Jones Newswires

May 02, 2018 05:44 ET (09:44 GMT)

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