BILL NUMBER: S3943

SPONSOR: GOUNARDES
 
TITLE OF BILL:

An act to amend the tax law, in relation to computation of franchise tax
on taxpayers with a business income base exceeding five million dollars

 
PURPOSE OR GENERAL IDEA OF BILL:

To create a higher 9% tax rate on business income for corporations
subject to the business income base for corporate franchise tax under
Article 9-A of Tax Law

 
SUMMARY OF PROVISIONS:

Section one of this bill raises the tax rate for business income base,
which is one of the inputs in the formula that determines a company's
corporate franchise tax under Article 9-A, from the current 7.25% to 9%
for businesses with a business income (BI) of more than $5 million.

Section two of this bill sets the effective date.
              

 
JUSTIFICATION:

In the world of business taxation, corporations generally sort them-
selves into one of two categories: C corporations, a structure in which
owners or shareholders are taxed separately from the business, or pass-
through entities, wherein the business profits "pass through" to the
shareholders to be reported on individual income tax returns and taxed
at individual income tax rates. Pass-through entities (PTEs) take many
different forms, including S corporations, limited liability companies
(LLCs), partnerships, or sole proprietorships. As C corporations must
pay taxes twice, both at the entity level when they remit the 21% feder-
al corporate tax, and then again when the corporation's shareholders
report their dividends on their individual returns or pay capital gains
on the stocks they sell, the vast majority of businesses in NYS choose
to organize as PTEs.

There are some advantages to organizing a C corporation, however: C
corps can have an unlimited number of shareholders, unlike S corps which
are limited to 100; C corps can offer many different types of stock with
different voting rights, vs. S corps which can have only one class of
stock and shares with equal voting rights; C corps can obtain large
amounts of venture capital more easily than PTEs; C corps can defer
domestic taxes of foreign income more easily than PTEs; and C corps have
"perpetual existence," meaning they can be institutionalized beyond the
lives of their shareholders. (Ancheta, Andrew. "How C Corporations
Work." Investopedia, 22 Apr. 2024,  
WWW.INVESTOPEDIA.COM/TERMS/C/ C-COR-
PORATION.ASP.; "What Is a C Corp? C Corporations Explained (Stripe."
Stripe.com, 19 Apr. 2023,  
STRIPE.COM/RESOURCES/MORE/WHAT-
IS-A-C-CORP.).  Consequently, larger corporations tend to organize as C
corps while smaller businesses overwhelmingly organize as pass-through
entities (PTEs).

Tax filing data tells this tale of two corporate cities, where a small
number of the nation's largest corporations choose the C corps formation
while the vast majority of small businesses are PTEs. Over 95% of busi-
nesses were organized as PTEs in 2019 ("How Do State and Local Corporate
Income Taxes Work?" Tax Policy Center, Jan. 2024,
taxpolicycenter.org/briefing-book/how-do-state-and-local-corporate-incom
e-taxes-work.) In 2011, sole proprietorships operated by a single indi-
vidual comprised the vast majority of all businesses at 73.1%, S corps
accounted for 13.1%, and eight percent were partnerships. C corps, mean-
while, comprised a mere 5.6% of businesses - yet with that 5.6% employed
nearly 45% of the total private sector workforce and disbursed 63% of
the private sector payroll. Seventy-two point three percent of C corps
workers were employed at firms with 500 or more employees in 2011, with
an additional 8.9% working at a firm between 100 and 500 employees
(Pomerleau, Kyle. "An Overview of Pass-through Businesses in the United
States." Tax Foundation, 21 Jan. 2015,  
TAXFOUNDA-
TION.ORCIFRESEARCH/ALLGEDERAL/ OVERVIEW-PASS-THROUGH-BUSINESSES- UNIT-
ED-STATES/)

New York imposes taxes on both C corporations and PTEs under Article 9-A
of the Tax Law, which contains the corporate franchise tax - essentially
a tax for the privilege of doing business in the state.  The corporate
franchise tax is calculated using one of three bases:  business income,
business capital, or a fixed dollar minimum, with corporations held to
the highest of the three. Business income, the primary base, is computed
by first calculating federal taxable income if a US corporation or
effectively connected income if a foreign corporation. Corporations then
make a number of state-specific modifications to arrive at entire net
income, before subtracting investment income and a category of "other
exempt income" under Tax Law § 208(6-a)(b), resulting in business income
(BI). BI is then multiplied by a BI base tax rate, and the product of
this equation is then subject to an apportionment formula based on how
much of the company's receipts are attributable to economic activity in
New York.  The resulting product of B1 times the apportionment factor is
the business's corporate franchise tax burden (Our New York, Our Future:
Fiscal Year 2025 Annual Report on New York State Tax Expenditures.  New
York State Department of Taxation and Finance and Division of the Budg-
et, 2024,  
WWW.TAX.NY.GOV/PDF/RESEARCH/
STATS/EXPENDITURE-REPORTS/FY25TER.PDF.).  Under Tax Law § 210(1)(d),
however, S corporations are subject to only a fixed dollar minimum of
$25 to $4,500, depending on New York receipts, rather than the higher BI
base that C corporations must pay.

The BI tax rate in Tax Law § 210(1)(a) is currently 6.5%, but 7.25% for
businesses reporting more than $5 million in BI through 2026. This bill
raises the BI rate for corporations at this same $5 million threshold to
9% and makes this higher rate permanent. As the vast majority of busi-
nesses in NYS are organized as PTEs subject only to the fixed dollar
minimum corporate franchise tax and not the higher BI base, this change
will affect only the state's largest firms that are organized as C
corporations.

This reform, drawn directly from proposals in the FY25 Senate and Assem-
bly one-house budgets, would unlock billions of dollars for the state to
invest in basic needs like child care, education, healthcare, transpor-
tation and housing. Our tax system has evolved to benefit the very weal-
thy. America's billionaires - about 800 people - control 57 percent more
wealth ($5.8 trillion) than the entire poorer half of U.S. society,
roughly 65 million households ($3.7 trillion).

Majorities of all Americans support higher taxes on the very rich. In
New York, more than two-thirds of voters say the government should raise
taxes on corporations and the wealthiest people to improve services for
New Yorkers. After decades of being sold trickle-down economics, we now
see it is empty rhetoric. The very rich are getting richer at the
expense of working Americans, who feel like they are working harder than
ever. These changes to New York's tax laws would provide the resources
and programs to keep families and college graduates in the Empire State.

 
PRIOR LEGISLATIVE HISTORY:

None

 
FISCAL IMPLICATIONS:

TBD

 
EFFECTIVE DATE:
Immediate