Coast-to-Coast Tax Developments: Opt-Ins in New York, Deferments in San Francisco
Thursday May 24th, 2018
There are some notable tax changes at the state and local levels for the 2018 tax year, with two historical bellwethers—New York and San Francisco—leading the way.
Following the passage of the federal Tax Cuts and Jobs Act, New York state responded by making changes to its 2019 budget that will offset what's now in the federal tax code. At the other end of the country, meanwhile, employers operating in San Francisco who were expecting to stop paying the payroll expense tax this year have been notified that they will be paying this tax for the foreseeable future.
New York's Opt-In Payroll Expense Tax
New York Gov. Andrew Cuomo (D) signed the state's budget for fiscal year 2019 on April 17. The budget, which takes effect on Jan. 1, 2019, includes an opt-in payroll tax that employers must elect by Dec. 1, 2018. The tax, referred to as the Employer Compensation Expense Program, is set to be introduced at a rate of 1.5 percent on employee compensation of at least $40,000 a year in 2019. The tax rate will increase to 3 percent in 2020 and 5 percent in 2021.
Some background: The federal tax cut law reduced the state and local tax (SALT) deduction by capping it at $10,000. The lower SALT deduction is expected to have a larger impact on taxpayers in California, New Jersey, and New York—states where taxes are high and taxpayers itemize their personal returns to claim the SALT deduction. New York's 2019 budget is designed to offset increases in federal tax that New York residents will owe because of the lower SALT.
According to an April article posted by Tax Foundation, this opt-in payroll tax will benefit few taxpayers. In order to work, employers have to reduce their employees' compensation by the amount of the payroll tax obligation they voluntarily take on. It sounds simple. But there are other factors involved in employee wages—such as contracts, labor agreements, and minimum wage laws—that could affect whether or not employees actually see a reduction in state and local taxes. While the opt-in tax may work for hedge funds and consultancies because they have small groups of highly compensated employees, the article said, it's more difficult to implement in a large corporation with a diverse workforce.
San Francisco's Payroll Expense Tax to Remain in Effect through 2018
For employers in San Francisco, the biggest tax-related change is what isn't changing: They will continue to pay the city's payroll expense tax through 2018. The Gross Receipts Tax and Business Registration Fees Ordinance took effect in 2014 and was scheduled to phase out in 2018, when it would be 100% replaced by a gross receipts tax.
The tax change was designed to be revenue-neutral, meaning that revenue raised by the new gross receipts tax would be used to retire the payroll expense tax. Beginning in the 2014 tax year, the payroll expense tax rate was incrementally reduced, while the gross receipts tax rate increased.
Tax year 2018 was supposed to be the last year of the payroll expense tax and, starting in 2019, businesses were going to pay only the gross receipts tax. However, gross receipts tax revenue has been less than expected, so the city decided to keep the payroll expense tax in place.
In February 2018, the city announced a provisional tax rate of 0.448 percent and said the rate tax year 2018 will be calculated using tax data as of July 1, 2018, and will be announced on or before Sept. 1, 2018.