Metro

Cuomo proposes state tax overhaul to counteract federal reforms

In a desperate move to “thwart” the federal tax overhaul, Gov. Cuomo said Tuesday he wants to make sweeping changes to the state tax code as he unveiled his new $168 billion budget plan.

The governor’s proposal would shift the state from collecting an income tax paid by individuals to a payroll tax paid by businesses — which would be fully deductible by businesses on federal returns.

“It would cost businesses nothing,” Cuomo said in his annual budget address in Albany. “Employees would be held harmless . . . Employers [would] pay a wage tax, which would be equal to that individual’s income tax.”

The governor insisted the changes would help New Yorkers cope with the new federal caps on state and local income-tax deductions.

But critics say the plan is a pipe dream.

“Attempting to replace New York’s personal income tax with a still-deductible business payroll tax would be fraught with mind-bending complications and unintended consequences,” E.J. McMahon, research director of the Empire Center for Public Policy, wrote on Twitter.

State Sen. John DeFrancisco (R-Syracuse), a likely Cuomo challenger in the fall, called the governor’s tax overhaul plans a “gimmick.”

“There are self-employed individuals. There are CEOs of corporations that get a draw from a partnership. So it doesn’t hit probably even half of all the taxes that are paid in the state,” he said.

Cuomo’s tax department was to release a report Wednesday with the details.

Robert Mujica, Cuomo’s budget director, said the switch would be voluntary for businesses.

“We’re running two parallel systems. If there’s a desire not to make any of these changes, you wouldn’t be in the system,” Mujica said.

Cuomo also said the state is examining whether to set up charitable funds for services such as education and health care, where residents make donations and get equivalent tax breaks on their state taxes.

The donations would also be deductible on federal returns for those who itemize.

“It’s not dollar for dollar,” he conceded. “It’s not a perfect situation.”

Critics have pointed out the tax changes would face significant hurdles.

“The IRS might well conclude that this is little more than a shell game, with the employer effectively remitting the employee’s income tax payments on his or her behalf,” Jared Walczak of the Tax Foundation wrote in a blog post.

“A progressive payroll tax, a concept that does not currently exist and is inconsistent with present notions of what a payroll tax is, would be particularly likely to draw IRS scrutiny.”

State Senate Majority Leader John Flanagan called the switch “very challenging.”

“Our finance people will look at this in painstaking detail,” he said.

To close the state’s $4.4 billion budget deficit, Cuomo proposed $1 billion in new taxes and fees. Flanagan said the Senate GOP would not support new taxes.

The budget increases spending on education by $769 million, and includes $254 million for the Big Apple’s transit system.