Governor Cuomo has indicated his desire to help state taxpayers losing the federal income tax deductibility of all their state and local tax payments above $10,000. While the intent is good to get around the discriminatory federal tax law signed in December, the details are proving to be problematic. His office is working on a plan to turn the state income tax to a state payroll tax which would be deductible under current federal law. His plan is set to be proposed to the Legislature in the coming weeks. It is all a very complicated plan but we are hearing some of the aspects of it which may negatively impact pensions and Social Security.
The payroll tax plan would result in wages being lowered as employers used the reduced wages to fund the payroll tax deposited for the workers. If a person’s gross pay is less, then they would pay less in Social Security and Medicare taxes but they would also have less annual earnings to count toward pension and Social Security benefits. Due to the structure of Social Security, most people, especially those who are lower income, get a lot more in retirement benefits than they contribute.
It is debatable whether it is worth making this change in the payroll tax because most people other than those with the highest incomes are not going to be effected by the federal limit on state tax deductibility. The Governor’s plan could negatively impact most taxpayers regarding retirement benefits while the tax swap of using the payroll tax would benefit those who have high state income taxes and property taxes. It seems like a bad swap unless it can be constructed in a way that only effects those high income earners which seems burdensome and unlikely.
The change in the gross income would also impact eligibility for a variety of other benefits and services.