Joint Legislative Public Hearing on 2018-2019 Executive Budget Proposal: Topic Taxes - Testimonies
February 15, 2018
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ISSUE:
- Executive Budget
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COMMITTEE:
- Finance
Hearing event notice and video:
https://www.nysenate.gov/calendar/public-hearings/february-08-2018/joint-legislative-public-hearing-2018-2019-executive
Transcript:
1
1 BEFORE THE NEW YORK STATE SENATE FINANCE
AND ASSEMBLY WAYS AND MEANS COMMITTEES
2 ------------------------------------------------------
3 JOINT LEGISLATIVE HEARING
4 In the Matter of the
2018-2019 EXECUTIVE BUDGET
5 ON TAXES
6 ------------------------------------------------------
7 Hearing Room B
Legislative Office Building
8 Albany, New York
9 February 8, 2018
9:37 a.m.
10
11 PRESIDING:
12 Senator Catharine M. Young
Chair, Senate Finance Committee
13
Assemblywoman Helene E. Weinstein
14 Chair, Assembly Ways & Means Committee
15 PRESENT:
16 Senator Liz Krueger
Senate Finance Committee (RM)
17
Assemblyman Robert C. Oaks
18 Assembly Ways & Means Committee (RM)
19 Assemblywoman Sandy Galef
Chair, Committee on Real Property Taxation
20
Senator Diane Savino
21 Vice Chair, Senate Finance Committee
22 Assemblyman David Buchwald
23 Senator James N. Tedisco
24 Assemblyman John T. McDonald III
2
1 2018-2019 Executive Budget
Taxes
2 2-8-18
3 PRESENT: (Continued)
4 Assemblywoman Patricia Fahy
5 Assemblywoman Earlene Hooper
6
7
8 LIST OF SPEAKERS
9 STATEMENT QUESTIONS
10 Nonie Manion
Acting Commissioner
11 Amanda Hiller
Deputy Commissioner and
12 Counsel
NYS Department of Taxation
13 and Finance
-and-
14 Robert Mujica
Director
15 NYS Division of Budget 6 17
16 Kenneth J. Pokalsky
Vice President
17 The Business Council of NYS 140 151
18 Edmund J. McMahon
Research Director
19 Empire Center for Public Policy 158 171
20 Michael Kink
Executive Director
21 Strong Economy for All
Coalition 194 203
22
Erin Tobin
23 VP, Policy and Preservation
Preservation League of NYS 213 218
24
3
1 2018-2019 Executive Budget
Taxes
2 2-8-18
3 LIST OF SPEAKERS, Cont.
4 STATEMENT QUESTIONS
5 Eric Linzer
President and CEO
6 New York Health Plan Association 220 224
7 Dede Hill
Director of Policy
8 Schuyler Center for Analysis
and Advocacy 233 239
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16
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4
1 CHAIRWOMAN WEINSTEIN: Are we ready to
2 start? After we have had our snow day
3 yesterday, we're anxious to get back to the
4 hearings.
5 Good morning. I'm Assemblywoman
6 Helene Weinstein, chair of the New York State
7 Assembly Ways and Means Committee and cochair
8 of today's hearing.
9 Today we begin the tenth in a series
10 of hearings conducted by the joint fiscal
11 committees of the Legislature regarding the
12 Governor's proposed budget for fiscal year
13 2018-2019. The hearings are conducted
14 pursuant to the New York State Constitution
15 and Legislative Law.
16 Today the Assembly Ways and Means
17 Committee and the Senate Finance Committee
18 will hear testimony concerning the Governor's
19 proposed budget proposals for taxes.
20 I will introduce our Assembly members
21 joining us, and then our cochair, Senator
22 Cathy Young, will introduce the Senators who
23 are here. And we're joined by Assemblyman
24 David Buchwald and Assemblywoman Sandy Galef,
5
1 chair of our Real Property Committee.
2 Senator Young.
3 CHAIRWOMAN YOUNG: Thank you,
4 Chairwoman.
5 And good morning, everyone. I'm
6 Senator Catharine Young, and I'm chair of the
7 Senate Standing Committee on Finance.
8 I'm very pleased this morning to be
9 joined by my colleagues. First of all, vice
10 chair of the Finance Committee, Senator Diane
11 Savino; ranking member Senator Liz Krueger;
12 and Senator James Tedisco.
13 CHAIRWOMAN WEINSTEIN: And we're also
14 joined, as we have been for every day of each
15 of those hearings, by our ranker on Ways and
16 Means, Assemblyman Bob Oaks, who has no one
17 yet to introduce. We'll see.
18 I just want to remind witnesses that
19 testimony has been submitted in writing, and
20 feel free to be concise and summarize your
21 testimony. And I'll just remind witnesses
22 and members to keep an eye on the clock.
23 With that being said, I'd like to
24 introduce our first witnesses. We're very
6
1 happy to have, from the New York State
2 Department of Tax and Finance, the executive
3 deputy commissioner, Nonie Manion, and the
4 director of the New York State Division of
5 the Budget, Robert Mujica.
6 I think, Mr. Mujica, you're going to
7 go first, and then the tax commissioner. I
8 think that's how -- so feel free to begin.
9 DOB DIRECTOR MUJICA: Okay, thank you.
10 Good morning, Chairwoman Young,
11 Chairwoman Weinstein. My name is Robert
12 Mujica. I'm the state director of the
13 Division of Budget. It's always a pleasure
14 to be with members of the Legislature, but I
15 wish that the circumstances were different
16 and that we were not having to discuss ways
17 to protect New Yorkers from the federal
18 assault.
19 Indeed, these are difficult times.
20 The new tax law was sold as a middle-class
21 tax cut, but according to the Tax Policy
22 Center, the largest cuts as a share of income
23 are going to taxpayers in the 95th and 99th
24 percentile of the income distribution. Any
7
1 benefits that do exist for middle-class
2 taxpayers are temporary and expire in the
3 year 2025. In fact, in 2027, 53 percent of
4 taxpayers will actually be paying more
5 taxes than before the law was enacted.
6 The largest benefit by far is to
7 corporations. The new law lowers the
8 corporate rate from 35 percent to 21 percent,
9 which is a 40 percent tax cut. There is no
10 similar reduction for individual taxpayers.
11 Furthermore, there are no assurances
12 that any of the $1 trillion which is being
13 given away will actually trickle down to
14 hardworking Americans.
15 Yes, there are those who support many
16 of the changes in the federal tax law, but no
17 New Yorker can support the capping of state
18 and local tax deductibility. In this regard,
19 the federal bill directly and unfairly
20 targets New York State.
21 Some say the rationale for this change
22 is that SALT is a subsidy to high-tax states.
23 We know that this claim is false. The
24 reality is that New York is a high-income
8
1 state, and the subsidy goes in the opposite
2 direction. New York contributes more to the
3 federal government than any other state -- a
4 net $48 billion. We are the number-one donor
5 state in the country, and by eliminating full
6 SALT deductibility, the federal government is
7 shifting even more of New York State's wealth
8 to other states.
9 The origin of SALT deductibility dates
10 back to the Revenue Act of 1862, when Abraham
11 Lincoln enacted the federal income tax to
12 fund the Civil War. The states demanded that
13 federal tax liability was to be exacted after
14 state and local taxes were deducted.
15 SALT was a requirement of the Revenue
16 Act of 1913 establishing the federal income
17 tax. And New York and many other states
18 built their tax codes around this
19 foundational premise, that the state taxes
20 first and then the federal government taxes.
21 The federal code encouraged local governments
22 to use deductible taxes in place of
23 nondeductible taxes to fund education and
24 healthcare and other services.
9
1 In 1985, President Reagan tried to
2 eliminate the SALT deduction, and he faced
3 overwhelming resistance and bipartisan
4 opposition. In response, that same year the
5 National League of Cities passed a resolution
6 calling SALT deductibility a fundamental
7 statement of the historical right of state
8 and local governments to raise revenues and
9 for individuals not to be double-taxed.
10 But here we are today; the threat is
11 now federal law. And the elimination of full
12 SALT deductibility has increased taxes for
13 1.7 million New Yorkers by $14.3 billion.
14 For many New Yorkers the loss of the federal
15 deductions means that their property tax bill
16 will increase by 25 percent. An individual
17 earning $100,000 annually will pay $1500 or
18 more in income taxes.
19 Whether most of your constituents are
20 part of the 1.7 million or not, it will wreak
21 havoc with our state by hurting our
22 competitiveness with other states. People
23 who are starting businesses that are creating
24 jobs upstate and downstate are the same
10
1 people who the federal tax law is pushing out
2 of New York altogether.
3 We have made so much progress lowering
4 taxes and improving Our competitiveness over
5 the past seven years. The Governor and the
6 Legislature have capped local property taxes,
7 cut middle-class income taxes, cut business
8 taxes, and every New Yorker now pays a lower
9 tax than they did seven years ago. Now the
10 federal government is undoing all that we
11 have accomplished.
12 And it will wreak havoc with home
13 values, the principal source of wealth for
14 our country's middle class. According to
15 Moody's, home values in many New York
16 counties, including Westchester, Nassau,
17 Putnam, Rockland, Orange and others, will
18 drop by as much as 10 percent. Along with
19 New Jersey, this is the largest impact of any
20 other state in the nation.
21 This theft of New York's home values
22 is a raid on families' individual assets.
23 And this is all to deliver a tax cut for the
24 largest corporations. It represents the
11
1 largest wealth transfer ever from New York to
2 other states.
3 Recognizing how bad it is for
4 New York, the vast majority of New York's
5 bipartisan congressional delegation voted
6 against this plan. We cannot do nothing.
7 The Governor said this before: To do
8 nothing, to sit idle while New Yorkers are
9 taken advantage of and while their taxes go
10 up and property values go down is not
11 acceptable.
12 In his budget address, Governor Cuomo
13 outlined a three-point strategy to defend
14 ourselves against this attack from
15 Washington.
16 First, we will challenge the loss of
17 income tax deductibility in the courts as
18 unconstitutional. It violates states' rights
19 and the principle of equal protection.
20 Second, we will lead the fight against
21 this injustice to start our own repeal and
22 replace effort.
23 And third, we will restructure our tax
24 code to protect New York taxpayers. This is
12
1 a massive undertaking. There are 5,692 pages
2 in the State Tax Law -- 13 volumes -- and
3 federal tax changes impact almost all of it.
4 But this is not unprecedented. After the
5 last major tax reform in 1985, the next year
6 was very active for tax reforms in states
7 across the country as they adjusted their tax
8 codes to deal with the new reality.
9 It's our job to protect the state's
10 taxpayers. It's what our predecessors have
11 done before us and what other states are
12 doing now.
13 To guide the evaluation and
14 consideration of options by state policy
15 makers, the Department of Tax and Finance
16 issued a report on the impacts and potential
17 state policy responses. The report
18 identified four key goals: Promote fairness
19 for New York State taxpayers, protect tax
20 progressivity and state services, protect and
21 enhance economic competitiveness, maintain
22 the short-term and long-term revenue base --
23 keep New Yorkers here.
24 I would like to thank the commissioner
13
1 and her staff for their work on this report,
2 and it is already bearing fruit. The report
3 identified where the state tax code is
4 coupled with the federal tax code, meaning
5 the federal tax increase would lead to state
6 tax increases as well.
7 We have reviewed those proposals, and
8 we will be including legislation in our
9 Executive Budget as part of the 30-day
10 amendments to address these impacts. We will
11 decouple from the federal tax code, where
12 needed, to protect our taxpayers.
13 Under the legislation, the deduction
14 for state and local taxes will be maintained
15 for the purposes of state taxation. This
16 action will lower the tax base to which state
17 tax rates are applied, shielding New Yorkers
18 from these federal changes.
19 This issue was created in Washington,
20 but we can fix it in New York, and the
21 administration looks forward to working with
22 the Legislature to get this done.
23 On all of these options, the state is
24 working with experts, employers, taxpayers
14
1 and other stakeholders to develop and
2 implement changes to the New York State tax
3 code. This work is ongoing, and there are
4 permutations as outlined in the Tax
5 Department's report. It is anticipated
6 within the 30-day amendment period that the
7 budget will be amended to include specific
8 proposals in response to the federal tax law
9 changes.
10 Once again, we cannot simply do
11 nothing, and the state must act. Thank you.
12 EX. DEP. COMMISSIONER MANION: Good
13 morning, Chairwoman Young and Chairwoman
14 Weinstein. My name is Nonie Manion. I'm the
15 executive deputy commissioner at the
16 Department of Taxation and Finance. I am
17 pleased to appear before you today to discuss
18 Governor Cuomo's 2019 Executive Budget.
19 The current budget environment is the
20 most challenging this state has faced since
21 the Governor first assumed office in 2011.
22 Weak revenue growth, coupled with substantial
23 cuts in federal aid, have combined to create
24 a $4.4 billion shortfall. The new federal
15
1 tax law only compounds these challenges.
2 Governor Cuomo's fiscal policies --
3 most notably, his adherence to the 2 percent
4 spending cap -- have ended the era of high
5 spending growth and tax increases. Today,
6 every New Yorker pays a lower tax rate than
7 they did before the Governor took office.
8 Thanks to historic middle-class tax cuts
9 enacted by the Governor and the Legislature,
10 taxpayers will save $26.3 billion over the
11 Governor's first two terms in office alone.
12 The Governor has also transformed the
13 business climate, laying the groundwork for a
14 more robust, competitive New York State.
15 New York now has the lowest corporate tax
16 rate since 1968, and the lowest
17 manufacturers' tax rate since 1917. Over the
18 course of the Governor's two terms, these tax
19 cuts will save businesses over $7 billion.
20 In partnership with the Legislature,
21 the Governor has also taken landmark steps to
22 combat the growth in property taxes. The
23 state's 2 percent property tax cap, enacted
24 in the Governor's first year in office, is
16
1 estimated to have lowered property taxes by
2 an average of $2,100. This was followed by
3 the enactment of real property tax relief
4 credits that will provide an additional
5 $1.3 billion in property tax relief, with an
6 average credit of $530 by 2019.
7 The federal tax legislation raises
8 taxes on millions of New Yorkers and uses
9 that money to pay for tax cuts for the
10 nation's largest corporations and
11 billionaires. At the Governor's direction,
12 the Department of Taxation and Finance issued
13 a preliminary report outlining options for
14 state tax reform with the potential to
15 mitigate adverse impacts of the federal
16 legislation on New York State.
17 The report lays out options for
18 policymakers to consider in response to the
19 loss of the deductibility of state and local
20 taxes. The report also identifies the many
21 flow-through impacts to the state's tax
22 system due to the changes in the federal tax
23 code where New York is currently conformed.
24 We hope this report can serve as a framework
17
1 for discussion of ways that the state can
2 adjust our tax code to mitigate the impacts
3 of the federal legislation.
4 The Governor is committed to
5 protecting New Yorkers from the negative
6 impacts of the federal tax changes. For
7 example, we anticipate that the Governor's
8 30-day amendments will propose that the state
9 decouple from the limitation on state and
10 local tax deductions, allowing the full
11 amount of local real property taxes to be
12 deducted from state income taxes. Congress
13 has taken actions that, absent changes to the
14 state tax law, will result in tax increases
15 for New York taxpayers. The Governor will
16 take action to protect New Yorkers in
17 response.
18 Thank you again for the opportunity to
19 speak with you this morning and for your
20 ongoing partnership on these critical issues.
21 I'm happy to answer any questions that you
22 may have.
23 CHAIRWOMAN WEINSTEIN: Thank you.
24 Thank you both for being here.
18
1 So it's been several weeks since the
2 white paper came out -- pretty dense,
3 37 pages. And obviously you've been moving
4 forward in trying to answer some of the
5 questions that you raise, with probably just
6 about a week to go before we actually see the
7 30-day amendments.
8 So -- and in that white paper you
9 identified some of the unintended
10 consequences of some of the potential
11 actions, such as the payroll tax, which
12 depends in large part on having salaries
13 lowered. And I was wondering how -- if
14 you've thought of ways to address some of
15 those consequences of people having lower
16 salaries and what that means in areas such as
17 alimony support, retirement benefits,
18 implications for Social Security. I was
19 wondering -- without yet having the finalized
20 details, I assume you've moved in that
21 direction. If you could fill us in on how
22 some of those discussions are happening and
23 how you think you'll be able to solve some of
24 those problems.
19
1 DOB DIRECTOR MUJICA: Moving from an
2 income tax to an employer-based tax was
3 listed in the report as one of the options,
4 and we also listed their complications too.
5 It's difficult -- as you point out, there are
6 a lot of other factors that you have to take
7 into account. We're looking at all of those.
8 Many of those can be fixed with statutory
9 changes, and that's why it's taking time to
10 go through it. But for a lot of the things
11 that you identified, there are statutory
12 fixes that we could use to take away some of
13 those consequences. So we're looking at all
14 of those now, and those are things I think we
15 can address.
16 CHAIRWOMAN WEINSTEIN: And we'll be
17 hearing from our Real Property Tax chair, but
18 what are some of the -- in terms of the
19 concept of a charitable deduction, some sort
20 of a charitable deduction for property tax as
21 a way to help reduce the amount of property
22 taxes that people will not be able to deduct,
23 what are some of the challenges and potential
24 negative consequences from looking at a
20
1 charitable deduction for property tax?
2 DOB DIRECTOR MUJICA: So a lot of
3 other states are looking at the charitable
4 contributions as well. And when we looked at
5 it, an individual can make a donation to a
6 hospital presently, they make a donation to a
7 school presently, and get a charitable
8 deduction. And before, there was no
9 difference between making a charitable
10 deduction on the personal income tax side or
11 paying a tax.
12 Now, if you pay the tax, you don't get
13 the deduction, but if you made a charitable
14 contribution, you could. So we're looking at
15 ways to reduce people's either property tax
16 burden or even income tax burden by making
17 charitable contributions to -- for our
18 purpose, that government would also fund.
19 The challenge there is really just
20 it's complicated in the Tax Law, making those
21 changes. We have to adjust on the state side
22 because we would lose revenue. Revenue that
23 would normally come to the state would go to
24 fund -- whether it be schools, whether it be
21
1 healthcare, whether it be anything else that,
2 you know, we decided to send the money to.
3 So there's cash flow issues that we
4 have to take into account, there are issues
5 related to personal income tax bonds that we
6 have to take into account as we shift
7 resources from dedicating it to the personal
8 income tax to other funds. But these are
9 also things that we think can be overcome,
10 and the Tax Department has been working on
11 language to do that.
12 CHAIRWOMAN WEINSTEIN: And I just want
13 to refer back to -- you're saying that in the
14 30-days we're going to see the uncoupling
15 that will allow state and local taxes to be
16 deductible. You're anticipating having also
17 the change of uncoupling to allow individuals
18 in New York State who take a standard
19 deduction -- or are you allowing individuals
20 who take the federal standard deduction to be
21 allowed to itemize in New York State? Or
22 would they be restricted to a state standard
23 deduction also?
24 DOB DIRECTOR MUJICA: That's right.
22
1 Under present law, you had to itemize at the
2 federal level in order to itemize at the
3 state level. So we would decouple from that
4 and allow individuals to take the standard
5 deduction at the federal level and still
6 itemize at the state level.
7 CHAIRWOMAN WEINSTEIN: Okay. I think
8 I'm going to turn it over to the Senate, and
9 then we'll hear from our Real Property chair.
10 Thank you.
11 CHAIRWOMAN YOUNG: Good morning.
12 EX. DEP. COMMISSIONER MANION: Good
13 morning.
14 DOB DIRECTOR MUJICA: Good morning.
15 CHAIRWOMAN YOUNG: First of all, I'm
16 very glad to hear that in the Governor's
17 30-day amendments there will be a provision
18 regarding legislation that was already passed
19 in the Senate sponsored by Senator Felder.
20 Director Mujica, is the Governor's plan going
21 to be any different than what has passed the
22 Senate, or will it be the same language?
23 DOB DIRECTOR MUJICA: We haven't gone
24 through exactly, Senator, that bill. But we
23
1 did, you know, go through it when it passed,
2 and it's substantially similar. So we're
3 going through all of those provisions. But
4 the vast majority of that bill is consistent
5 with what we plan to propose in the 30-day
6 amendments.
7 CHAIRWOMAN YOUNG: Great.
8 I listened to your testimony, and one
9 of the things that I wanted to ask about was
10 that the Governor has stated that the loss of
11 the SALT deductibility will cost New Yorkers
12 roughly $14 billion annually. How was that
13 number determined?
14 DOB DIRECTOR MUJICA: The 14.3 is
15 basically we look at the what -- the number
16 or the amount of deductions that all
17 New Yorkers presently have under state and
18 local taxes above $10,000. So when you look
19 at that, the remainder was 14.3; New Yorkers
20 are no longer allowed to deduct state and
21 local taxes above $10,000. And that number
22 is $14.3 billion, and it's 1.7 million
23 taxpayers.
24 CHAIRWOMAN YOUNG: So this number
24
1 doesn't take into account the reduction in
2 rates to taxpayers?
3 DOB DIRECTOR MUJICA: So the reduction
4 in rates to taxpayers -- everyone in the
5 nation benefits from the reduction in the
6 rates to taxpayers. New York, however --
7 New York and a few other states are far
8 disproportionately impacted by the
9 elimination of state and local tax
10 deductibility.
11 That's why it's unfair to New York,
12 because what you're doing is you're saying
13 we're going to take away state and local tax
14 deductibility, take $14.3 billion out of
15 New York, and then we're going to give some
16 back. Right? But the "some back," you're
17 giving back to everyone. You're giving far
18 less back to New Yorkers than you're giving
19 to everyone else across the country. So it
20 doesn't balance out.
21 So overall, New Yorkers should be in
22 the same position as everyone else in the
23 nation, and if we would have, we'd be
24 $14.3 billion to the good.
25
1 CHAIRWOMAN YOUNG: No, I'm aware that
2 we're a net donor state, as you pointed out.
3 I guess the question is, though, the
4 14 billion is just what people previously
5 were able to deduct under the SALT, right?
6 But are there other tax advantages that are
7 under the federal tax reform that would
8 benefit New Yorkers so that their loss isn't
9 quite as much as the $14 billion? That's my
10 question.
11 DOB DIRECTOR MUJICA: There are some
12 changes in the federal law that do mitigate
13 some of the 14.3, but it's still a massive
14 transfer from New York to other states. So
15 while yes, on the margins there are, if you
16 look at individuals in certain parts of the
17 state, the higher your -- the reality is that
18 only 10 states {sic} have average state and
19 local taxes of $10,000 or below. So that
20 means every other county -- so only 10
21 counties have state and local taxes below
22 10,000. So every other county in the state
23 has taxes above that amount. In parts of the
24 state, it's more than double that amount.
26
1 So -- and then there's also a ripple
2 effect, right, where you can't account for
3 the declining home values which are a result
4 of not being able to deduct your taxes. So
5 there is an attempt by the federal government
6 to mitigate some things, but the damage is
7 far greater than any benefit.
8 CHAIRWOMAN YOUNG: Thank you.
9 So it sounds like you're talking
10 about -- what was the term you used? Going
11 to -- moving to an employer-based tax. Is
12 that another term for a payroll tax?
13 DOB DIRECTOR MUJICA: It's one of the
14 options, an employer-based tax. And a
15 payroll tax -- anything that's on your
16 paycheck is a payroll tax. Unemployment
17 insurance is a payroll tax, Social Security
18 is a payroll tax.
19 What we're talking about is instead of
20 having a personal income tax or the same
21 personal income tax, having an employer-based
22 tax.
23 And I think the issue is that -- as I
24 mentioned in the testimony, we've been
27
1 deducting state and local taxes for over a
2 hundred years, so we've built our tax code
3 around things that we know are deductible.
4 When you change a hundred years of precedent,
5 we're saying, well, we need to change
6 potentially our tax law. We would not have
7 probably used an income tax as the basis if
8 it was not deductible if you knew that the
9 employer side tax would be deductible.
10 So we're saying we need to relook at
11 that, and perhaps it makes more sense to have
12 something that is deductible so that the
13 federal government continues to allow for the
14 deduction for --
15 CHAIRWOMAN YOUNG: So hence charitable
16 foundations, possibly.
17 DOB DIRECTOR MUJICA: Exactly.
18 CHAIRWOMAN YOUNG: Okay. What
19 percentage of the $14 billion estimate that
20 you gave would be addressed by switching to a
21 payroll tax?
22 DOB DIRECTOR MUJICA: So it depends on
23 how you do it. In the Tax & Finance report
24 it listed multiple options, right? There's
28
1 an option for a mandatory employer-based tax,
2 there was an option for limiting it based on
3 income. As you go further down the income --
4 as Chairwoman Weinstein mentioned, as you go
5 down in income, there's more friction and
6 there are more things that you have to
7 change.
8 And so it depends on how far down you
9 go. If you do everyone, you can mitigate a
10 majority of it.
11 It only deals with wage income, so --
12 you mentioned it. So dealing on the employer
13 side only deals with wage income. You would
14 have to look at nonwage income as well. And
15 in the report we also mention some options
16 for nonwage income. We think the pieces have
17 to work together. So there's an option --
18 all of these pieces are not mutually
19 exclusive. So you have something on the
20 payroll tax side, if you want something
21 employer-based, you have something on the
22 charitable side as well, and then something
23 as well for nonwage income.
24 Together, we think we can mitigate the
29
1 vast majority of the 14.3.
2 CHAIRWOMAN YOUNG: So you're not
3 saying just a payroll tax or just a
4 charitable foundation structure, you're
5 saying it could be a combination of many
6 different factors.
7 DOB DIRECTOR MUJICA: Exactly.
8 CHAIRWOMAN YOUNG: So -- I have some
9 more questions, though. Wouldn't you have to
10 continue to have a personal income tax to
11 account for taxpayers who are self-employed?
12 DOB DIRECTOR MUJICA: So we mention
13 that -- and the report mentions as well --
14 that you could create a whole new system.
15 It's very complicated to do that and to do it
16 that quickly. The federal government passed
17 this bill, the president signed it on
18 December 22nd, right. We're sitting here in
19 February trying to redo our code.
20 So you could replace the system, but
21 you could also leave the income tax in place.
22 And if you leave the income tax in place, you
23 deal with wage income, you have a system of
24 credits and potentially different alternative
30
1 taxes to be able to benefit, as you
2 mentioned -- it mentioned sole proprietors
3 and mentioned partnerships and such.
4 So yes, again, the different
5 combination of pieces and as well leaving a
6 PIT in place in the short term may be one of
7 the easier ways to deal with this.
8 CHAIRWOMAN YOUNG: Would that be a
9 real burden on the department, though? I
10 mean, would you need extra staff, to
11 administer, two programs or possibly three or
12 four programs?
13 EX. DEP. COMMISSIONER MANION: We've
14 been looking at all the different options
15 that are in the report, and we've looked at
16 the different systems that we have. We
17 administer over 40 taxes. So looking at all
18 the different systems that we have, we
19 believe that we have something in place that
20 can be the foundation for the systems that
21 would be required for the different models.
22 CHAIRWOMAN YOUNG: Okay, thank you.
23 How do you explain to employees that
24 their wages are going to be reduced? I mean,
31
1 I think that -- even if there's a net benefit
2 to them, I think that would be a very
3 difficult undertaking, to say to people, you
4 know, don't worry about it, we are reducing
5 your wages and it may affect your retirement,
6 it may affect collective bargaining, it may
7 affect your Social Security benefits.
8 How would we do that? I think you
9 could possibly make the Governor and the
10 Legislature extraordinarily unpopular by
11 taking that action.
12 DOB DIRECTOR MUJICA: So I think you
13 start from the premise that the federal
14 government raised your property taxes and
15 raised your income taxes, right? By
16 eliminating deductibility, that's what they
17 did. So you start from your income taxes
18 will go up and your property taxes are going
19 up as a result of the federal action. So
20 that's the first premise.
21 And what we're trying to do is how do
22 we mitigate that as much as possible. And
23 how do you mitigate that as much as possible?
24 You're not paying a dollar more. There's
32
1 take-home pay and there's the taxes you pay,
2 whether your employer is paying the tax,
3 whether you're withholding the tax -- your
4 withholding is substantially similar to
5 anything else that we're going to do. So
6 whether you're withholding and you never see
7 that money, you have the same amount of
8 take-home pay. Whether there's a payroll tax
9 as an alternative to an income tax, the
10 employee should take home the same amount of
11 money. So that should stay substantially the
12 same. And there's no proposal that we're
13 looking at which would diminish the actual
14 dollars that an individual takes home.
15 If you don't do this, if you do
16 nothing, we do know what will happen. If we
17 do nothing, income taxes go up, property
18 taxes go up.
19 So I think all of the challenges that
20 you've identified, we're working through.
21 And we recognize them. But the alternative
22 would be to do nothing, and we don't think
23 that's an acceptable policy.
24 CHAIRWOMAN YOUNG: What about --
33
1 Director Mujica, have you looked at people
2 that are lower income earners and whether
3 lowering their wages would then push them
4 down into social programs like Medicaid? And
5 what would the implications be of additional
6 burdens on the taxpayers if more people are
7 thrown into these social programs?
8 DOB DIRECTOR MUJICA: So those are the
9 things that we would have to adjust for,
10 because those are not outcomes that we're
11 looking to have happen.
12 So we mention that on the -- if you do
13 an employer side tax, that you'd want -- you
14 can start it at any salary level, it doesn't
15 have to be for all employees. You can start
16 or you can create a threshold. I think the
17 report mentioned certain thresholds, and we
18 can pick what number that is, working with
19 the Legislature.
20 But yes, as you go down, there are
21 more and more changes that we would have to
22 do to eligibility for certain programs,
23 et cetera. But I think you can eliminate a
24 lot of those by choosing a threshold that's
34
1 higher than the trigger for many of those
2 programs that you identified.
3 CHAIRWOMAN YOUNG: So thank you for
4 that.
5 So what about people's retirement? A
6 lot of people's retirement amounts depend on
7 how much they're earning. You say there's a
8 statutory fix for that?
9 DOB DIRECTOR MUJICA: We can do a
10 statutory fix for final average salary for
11 your pensions. You could change the law to
12 fix that as well. So the answer is yes.
13 Could we change those things, could we fix
14 those things? Yeah.
15 And again, this has been built over a
16 hundred years. We expected all of these
17 things to be deductible. If you change it,
18 there are lots of other places where you
19 would have to change the law. But the fact
20 that you'd have to change those things
21 shouldn't stop us from doing -- creating the
22 fix. Because again, if you don't do
23 anything, you go back to the same thing,
24 which is just a massive tax increase for New
35
1 Yorkers.
2 CHAIRWOMAN YOUNG: How would
3 collective bargaining -- how would you fix
4 that? If there's a collective bargaining
5 agreement, how would you statutorily fix
6 that?
7 DOB DIRECTOR MUJICA: We've been
8 talking to -- we've had roundtables and
9 discussions with employer groups, with tax
10 experts. And we've had labor in the room as
11 well, so we've been discussing with them.
12 They understand the challenges, but they also
13 understand how bad this impacts their
14 members. So they're actually sitting at the
15 table with us, saying: We recognize that
16 there's an issue on wages, but let's work
17 together and figure out how to fix those, on
18 behalf of their members, because the worst
19 thing for their members is to pay, you know,
20 thousands of dollars more in taxes. They're
21 all impacted by the property tax elimination,
22 and they're impacted by the personal income
23 tax.
24 So they get it, and we're working with
36
1 labor to see how you can adjust for it.
2 CHAIRWOMAN YOUNG: How can you ensure
3 that there's a dollar-for-dollar correlation
4 between reduced pay and reduced tax
5 liability? Can you ensure that taxpayers are
6 held 100 percent harmless?
7 DOB DIRECTOR MUJICA: The four
8 principles of the report, right, one was --
9 number one was to protect the taxpayers and
10 be fair. So that is what the goal here is.
11 The goal here is not to raise
12 additional revenue for the state, It's to get
13 as much of the money back from the federal
14 government as possible and restore us to
15 where we were.
16 So that is what we're crafting. And
17 that's why it's complicated, because we want
18 to ensure that no New Yorker is paying more
19 in taxes now than they were before. In fact,
20 they're going be paying less than they were
21 before the tax bill and perhaps -- perhaps --
22 perhaps, because you lower their AGI, even
23 less than actually before the federal law.
24 CHAIRWOMAN YOUNG: But isn't it
37
1 difficult to get a dollar-for-dollar
2 correlation?
3 DOB DIRECTOR MUJICA: We're not
4 looking at a dollar-for-dollar correlation
5 between the two. We're talking about
6 replacing, potentially, the personal income
7 tax with a tax that's deductible. And how we
8 structure that is what the Tax Department is
9 working on now.
10 CHAIRWOMAN YOUNG: Okay. Thank you.
11 I'll come back.
12 CHAIRWOMAN WEINSTEIN: Thank you.
13 We've been joined by Assemblywoman
14 Fahy and Assemblyman McDonald.
15 And now we go to our chair of the Real
16 Property Tax Committee, Assemblywoman Galef.
17 ASSEMBLYWOMAN GALEF: Thank you very
18 much.
19 I just wanted to ask some questions in
20 the area of STAR and real property tax
21 proposals. You know, one of the most popular
22 programs that we have in our state is the
23 STAR, the school property tax relief program.
24 When everybody gets their bill at home with
38
1 their school taxes, they look down there and
2 see how much the state is saving them and
3 that we have some other -- you're going to be
4 coming to a hearing on Monday, so we'll go
5 into those particulars.
6 But in the budget there is a proposal
7 to again return to a zero percent increase in
8 the STAR program. And, you know, given all
9 the discussions before about everybody
10 feeling the impact of the federal government
11 and the whole issue with local taxes, it
12 would seem like this is not a year to not let
13 that formula drive to the 2 percent increase,
14 as opposed to having it frozen at zero
15 percent.
16 So I wondered what the thinking was --
17 and maybe there's clarity in the thinking
18 before the 30-day amendment.
19 EX. DEP. COMMISSIONER MANION: Well,
20 you know that we're in the second year of the
21 tax relief program. And the tax relief
22 program is now calculated based on a person's
23 income and their STAR benefits they have.
24 And for the lower-income people, with
39
1 the relief, they're getting 28 percent of
2 their STAR benefit. So we think that the
3 relief is actually offsetting -- would offset
4 a lot of what would be increased in the STAR
5 benefit.
6 ASSEMBLYWOMAN GALEF: Well,
7 actually -- first of all, that program only
8 lasts for another year after this year,
9 right, with an increase. And -- I mean, to
10 say again to our constituents that we're
11 limiting the STAR program, which is on the
12 tax bill -- this other one comes -- I just
13 got my check last week. So it comes a lot
14 later than when you're paying your taxes.
15 And I think there's an effort, I know in the
16 Assembly, to really work on making sure that
17 the increase is driven forward.
18 So I don't think we necessarily agree
19 with your approach just because there's
20 another program. Last year we also had
21 another program. We got a $130 check or a
22 $170 check. And we were able to have it
23 increase, have an increase in the STAR
24 program.
40
1 EX. DEP. COMMISSIONER MANION: Yeah,
2 the check that was received last year was the
3 first year of the tax relief, and it was a
4 flat check. And now the tax relief is based
5 on your STAR benefits and your income.
6 We do have our system in place now
7 where we're able to issue the relief checks
8 much sooner. So we've been successful with
9 that system and getting our STAR credits sent
10 out prior to the tax bills being on time.
11 So we can work with the timing. You
12 know, we've got a lot more flexibility now
13 that we have our system up and going.
14 ASSEMBLYWOMAN GALEF: Right. Well,
15 we'll get into the system because I've had a
16 lot of people in my office that did not get
17 it in time.
18 Another question is on the income
19 verification program, which I think is a real
20 good program that anybody in Advanced STAR
21 would have their income verified through your
22 office. But to require it to be mandated I
23 think is very problematic for many people in
24 our state. We're dealing with senior
41
1 citizens. Many are not as proficient at
2 getting everything to the Tax and Finance
3 Department in a way that they should.
4 Is there not an approach that we can
5 use for the assessors also to continue to be
6 a part of helping seniors that are going into
7 the enhanced program be a part of this?
8 EX. DEP. COMMISSIONER MANION: Well, I
9 think that the income verification program is
10 working well. It works well. Some areas use
11 it very wide, other areas don't use it as
12 much.
13 Again, our new system has allowed us
14 to do the automatic verifications with it.
15 And for the programs that we've been doing
16 with the relief program and then the STAR
17 credit, we have had to reach out to some of
18 the seniors to get income worksheets, because
19 we have to do income verification for those
20 programs too.
21 So I think that we are well along the
22 way there. And we are also finding with any
23 new program that we open up, when we do the
24 income verification, that there are people
42
1 that are applying that think that they're
2 eligible for it and their income is really
3 over the threshold.
4 ASSEMBLYWOMAN GALEF: But what process
5 do you go through to initiate all this? I'm
6 just thinking -- you know, it's hard to get
7 to the Tax Department with a phone number.
8 And these are people that might be using the
9 phone and not the internet. And what
10 percentage of people are in the income
11 verification program at this point?
12 EX. DEP. COMMISSIONER MANION: We do
13 understand that a lot of people that would be
14 applying for this may not be using the
15 computer as much. We've improved our
16 relationship with our assessors, and we've
17 provided the assessors with a hotline so --
18 understanding that some of these people will
19 continue to go into the assessor's office.
20 The assessors can assist them with this. But
21 once they sign up for it, it's a one-time
22 thing. You know, we'll be able to do the
23 checks.
24 So I think that will simplify it. It
43
1 might be a little bump in there first, but
2 afterwards it will be much easier.
3 ASSEMBLYWOMAN GALEF: So the
4 assessor's office, they can get through.
5 EX. DEP. COMMISSIONER MANION: Yeah,
6 we have a hotline for them, because -- yes.
7 ASSEMBLYWOMAN GALEF: Okay. Another
8 question about the annual assessment of
9 taxable state-owned land. You're proposing a
10 new policy that would keep it at the prior
11 level of assessment of the year 2017 with
12 state-owned land and then increase it
13 annually by the growth factor.
14 Can you explain that a little bit and
15 what would happen if there's new state land
16 that is acquired that we adopt, you know,
17 legislation that would require certain land
18 to become state land for tax purposes? And
19 also, what would happen in a community that's
20 reassessing their property, so they're
21 reassessing the state-owned land -- are you
22 artificially keeping them at a lower level?
23 EX. DEP. COMMISSIONER MANION: If
24 there's new state-owned land, it would be
44
1 assessed and then that would be the base
2 level.
3 For those that are going through
4 reassessments, I think everybody that is
5 involved in assessing the state-owned land
6 understands the challenges with it. And so
7 this is to reduce a lot of that
8 administrative burden, both for the locals
9 and for the state, in coming up with the
10 value that the tax should be applied on.
11 So by staying with the 2017 and
12 increasing for inflation, we think it's most
13 efficient for all.
14 ASSEMBLYWOMAN GALEF: So you're saying
15 that the state is going to assess the
16 state-owned property.
17 EX. DEP. COMMISSIONER MANION: If it's
18 new.
19 ASSEMBLYWOMAN GALEF: If you're in a
20 reassessment situation --
21 EX. DEP. COMMISSIONER MANION: No, not
22 in a -- in a reassessment situation, they
23 wouldn't have to reassess for the state-owned
24 land. They would be doing their reassessment
45
1 for the other parts of their community. The
2 state-owned land would stay at the 2017 value
3 increased by the rate of inflation.
4 ASSEMBLYWOMAN GALEF: But many
5 communities have really not really paid that
6 much attention to the assessment on the
7 state-owned-land properties because a long
8 time ago they weren't really getting much
9 money, they were getting PILOTs or something
10 like that. So you're denying them the
11 ability to really look at their property and
12 find out what it should be assessed at. I
13 think that's the bottom line. To save the
14 state money, I guess.
15 Let me just ask you about another one
16 where -- and this is a big issue, I would
17 think, particularly in New York City about
18 the cooperative apartments that are sold and
19 that you're going to require them to have a
20 transfer piece of paper come to you so you
21 know who owns the co-op. Is that going to be
22 an easy project for you?
23 EX. DEP. COMMISSIONER MANION: We need
24 to be able to -- as we were doing the relief,
46
1 we weren't able to identify the value of all
2 of the different parts of the co-op. And so
3 that was a challenge that we had, so we -- by
4 having them reported and then report all the
5 transactions, it follows along with our real
6 estate transfer tax. So it's the same type
7 of process that we would get, but we would
8 get the information for the co-ops also. So
9 we would have an better idea, an ongoing idea
10 of the value of the individual co-ops within
11 the units -- the units within the whole
12 co-op.
13 ASSEMBLYWOMAN GALEF: Right. Okay.
14 And the other is the mobile homes,
15 which really doesn't come under my committee.
16 But I think you're requesting that they have
17 a quarterly report about who is living in the
18 mobile homes for the purpose of STAR?
19 EX. DEP. COMMISSIONER MANION: Yeah.
20 We had a challenge with our STAR credit
21 checks. Our STAR credit checks this year, we
22 were able to get 98 percent out on time.
23 However, our biggest challenge was in
24 identifying the owners of the -- in the
47
1 mobile home parks. So we actually -- you
2 know, we worked with the assessors, because
3 that's not information that they regularly
4 get. Some of them do, and some of them
5 don't. And we worked with them in
6 identifying who didn't have that information.
7 We actually sent some of our field auditors
8 out physically to the mobile home parks to
9 obtain the information so that we can get the
10 START credit check out on time.
11 So we feel that by having a regular
12 reporting on this, we'll have a regular
13 accounting for who should be receiving the
14 check.
15 ASSEMBLYWOMAN GALEF: All right.
16 Having a quarterly contact -- what happens if
17 people aren't doing it? What's the penalty?
18 EX. DEP. COMMISSIONER MANION: It's
19 with -- just about anything that we do in the
20 department, if we're not finding compliance,
21 we have different compliance efforts that we
22 take. We can do things through mailing or we
23 could send the same auditors out to go
24 physically to the place to try to get some of
48
1 the information.
2 CHAIRWOMAN WEINSTEIN: Thank you.
3 Senate?
4 CHAIRWOMAN YOUNG: Senator Savino.
5 SENATOR SAVINO: Thank you, Senator
6 Young.
7 Good morning. I want to go back to
8 the decoupling legislation. As you know, we
9 passed it in the Senate. We're happy to see
10 it's going to be included in the 30-day
11 amendments. But maybe I'm mistaken about
12 this, but it's my understanding that when the
13 state put out the fiscal plan, the additional
14 revenue that it expected residents to have to
15 pay due to the loss of the SALT was included.
16 Will that be adjusted with the 30-day
17 amendments?
18 DOB DIRECTOR MUJICA: Yeah, we'll have
19 to adjust the financial plan. It didn't
20 affect 2019, but it affected 2020. So we'll
21 adjust the financial plan to reflect that,
22 yes.
23 SENATOR SAVINO: Okay. And on -- I'm
24 confused about the charitable contribution
49
1 thing and the prepayment of taxes. I know at
2 the end of 2017 the Governor recommended, if
3 you could, prepay your taxes. And some
4 counties participated, and some didn't.
5 Do we have a sense of how many people
6 did? Because most people who have a mortgage
7 in New York State impound their taxes in
8 their mortgage. So how do you separate your
9 property tax payment from your mortgage and
10 be able to pay it? So did in fact people do
11 that? And will we not anticipate the same
12 problem with the charitable contribution
13 issue? More of a question for the Department
14 of Tax.
15 EX. DEP. COMMISSIONER MANION: We
16 don't have a count of how many people did it.
17 But through anecdotal information -- I know I
18 spoke to some of the people at the
19 Association of Counties last week, and they
20 said that they had people in lines paying
21 millions of dollars prior to the end of the
22 year to ensure that they can get the
23 deduction.
24 We did have people that were working
50
1 with the banks, because a lot of people have
2 it in their escrows. And a lot of the banks
3 did work with them in allowing for them to
4 pay it and balance out their escrow. So it's
5 something that would have to be coordinated.
6 SENATOR SAVINO: Right. But you'd
7 have to have the resources to actually prepay
8 your property taxes. And in some counties I
9 would think that would be cost-prohibitive
10 for individuals. It's just interesting,
11 though, how you have to decouple it from your
12 mortgage now.
13 For the Department of Tax and Finance,
14 I think the budget director said that there's
15 going to be many changes to try and adjust to
16 what happened to us in Washington, which
17 could require a lot of different changes in
18 tax law and how we adapt it into
19 hundred-year-old statutes.
20 Do you have, at the Department of Tax
21 and Finance, sufficient staff to be able to
22 make all these changes? Because when we did
23 the workforce update, it was pretty clear the
24 state workforce is remaining flat. There's a
51
1 couple of hires to backfill after attrition,
2 but we're not seeing a large number of new
3 staff at Tax & Finance.
4 Do you believe that you'll be able to
5 administer these new tax changes?
6 EX. DEP. COMMISSIONER MANION: The way
7 we've been managing our budget is we've been
8 moving a lot towards automation. So over 90
9 percent of our personal income tax filers
10 file electronically. Well over 90 percent of
11 our sales tax filers file electronically.
12 And when we put the systems up and we work
13 with our partners, the software partners that
14 do a lot of that electronic filing, we're
15 able to fine-tune it so that the returns and
16 the information and the money comes in
17 without having to rely on our employees to
18 work with the taxpayers.
19 So we've been able to streamline a lot
20 of that, really enhance our voluntary
21 compliance. We have a good partnership with
22 our IT people that work our systems. So we
23 feel that we can develop the systems
24 necessary for any tax law changes, as we do
52
1 every year. There are tax law changes every
2 year.
3 We do make decisions. You know, there
4 are decisions of things that are done in that
5 time, and we'll continue to do that.
6 SENATOR SAVINO: And finally, back on
7 the SALT thing. So about two-thirds of New
8 Yorkers don't itemize their deductions, so
9 they really never did take advantage of the
10 SALT. So do we have an idea of how many
11 people are really affected and what the
12 actual cost will be?
13 DOB DIRECTOR MUJICA: Well, the number
14 we have is 1.7 million New Yorkers pay more
15 than $10,000 in state and local taxes. So
16 that's the universe of individuals that are
17 affected. And that 1.7 million are
18 associated with the $14.3 billion. And those
19 are -- it's a portion of the individuals who
20 itemize. So you have about a third of
21 individuals who itemize. So of that third
22 that itemize -- it's about 3 million -- 1.7
23 million of them have taxes in excess of
24 $10,000.
53
1 SENATOR SAVINO: Thank you.
2 CHAIRWOMAN WEINSTEIN: Assemblyman
3 Oaks.
4 ASSEMBLYMAN OAKS: Thank you.
5 Actually, just to follow up on Senator
6 Savino's comments, in trying to identify the
7 impact -- and again, I think it's -- for most
8 of us, it's just trying to get a handle as we
9 go forward. And thank you for your earlier
10 comments to Senator Young's questions as
11 well.
12 In the SALT deductions, some taxpayers
13 are subject to the alternative minimum tax.
14 And so those earners, even though they would
15 have probably high income tax and local
16 property taxes, if they hit the AMT, they may
17 not use those to file because they're going
18 to pay their base tax anyway.
19 Do you know if the $14.3 billion takes
20 into account that group of payers or not?
21 DOB DIRECTOR MUJICA: I believe we've
22 adjusted for that, but I would --
23 DEPUTY COMMISSIONER HILLER: I believe
24 we were looking at state and local deductions
54
1 that are being taken out.
2 ASSEMBLYMAN OAKS: I'm sorry?
3 DEPUTY COMMISSIONER HILLER: I believe
4 we looked at state and local deductions that
5 are being taken now, so folks who were on the
6 alternative minimum tax weren't taking those
7 deductions.
8 ASSEMBLYMAN OAKS: Thank you.
9 And just for -- I know one of the
10 things that was highlighted was the
11 possibility of doing something with possibly
12 a donation and having a charitable donation.
13 I know there is some concern how the
14 IRS might treat that or not. So are we
15 anticipating that we will get a ruling back
16 from them or are we concerned it might be
17 challenged in court to say whether we could
18 or couldn't do that?
19 DOB DIRECTOR MUJICA: So we know that
20 the federal government acted in a way that
21 was hostile to New York. Or they needed the
22 money to pay for the broader tax cut.
23 So we're working within -- and the
24 attorneys in Tax & Finance can speak to this
55
1 as well -- we're working within the confines
2 of the bill. As anyone in the private sector
3 does, the state is now looking for, Are there
4 ways within the current tax law that we can
5 use to the advantage of our taxpayers? State
6 and local contributions and the charitable
7 deductions, there is a precedent. There's
8 other states presently that have charitable
9 deductions for educational purpose, where
10 they get a tax credit back. That tax credit
11 varies from as high as 100 percent and goes
12 down from there.
13 So there are precedents there. Are we
14 going to wait for a ruling? I think we have
15 to do what's in the best interests of New
16 Yorkers, working within the confines of the
17 bill, and do what we think and believe fits
18 within the framework of the bill and is
19 legal.
20 Can the IRS challenge some of the
21 things we do? Yeah, it's possible that they
22 do that. Like I said, the Governor is
23 looking at three different things. One is
24 change the tax code, two is attempt to repeal
56
1 and replace, and also we're suing. But we
2 think the charitable contributions we looked
3 at in other states are doing this as well, so
4 we think there is an opportunity there to get
5 some of the deductibility back. And I don't
6 know if Amanda has anything else on this.
7 DEPUTY COMMISSIONER HILLER: I guess
8 the only thing I would add is that although
9 it's certainly possible that the IRS might
10 make statements that would raise questions
11 about whether a particular charitable
12 structure was acceptable or not, at the end
13 of the day that becomes a fact-based analysis
14 for an individual taxpayer years from now.
15 Speaking for the State Tax Department, we
16 issue advisory opinions all the time, and
17 taxpayers do not feel bound by them. And we
18 find ourselves in court all the time, because
19 the fact that we said it doesn't make it
20 true.
21 ASSEMBLYMAN OAKS: Just for clarity,
22 too, we're hoping to do this that will impact
23 2018 taxes for our state's filings in 2019;
24 right?
57
1 DOB DIRECTOR MUJICA: We're looking
2 right now. So when we propose it, we'll see
3 the dates we're seeing. If we can get
4 something done for the 2018 tax year, we will
5 try. If not, then it will have to be for the
6 2019 tax year.
7 ASSEMBLYMAN OAKS: One of the things
8 is -- my understanding -- and I know we were
9 talking about taking a case to the federal
10 government and challenging in court. My
11 understanding is New York City doesn't --
12 can't write off their city income tax on the
13 state income tax. By us doing that, are we
14 subjecting us to the city coming and saying,
15 well, if you're not telling them they can't,
16 you know --
17 DOB DIRECTOR MUJICA: This is an issue
18 of state's rights between -- it's an
19 agreement between the states and the federal
20 government. As I mentioned, the very first
21 time that the federal government attempted to
22 raise money from the states, the requirement
23 was that you had to deduct state and local
24 taxes from your federal taxes, right, 1863.
58
1 And then when you created the modern
2 federal income tax, the state said only after
3 you deduct state and local taxes. The
4 principle was that the states tax their
5 citizens first to support local services.
6 The federal government can then tax after
7 that. But you can't double tax. You can't
8 tax on top of the tax. That's what the
9 personal income tax at the federal level was
10 based on going back to its earliest
11 inception.
12 So it doesn't relate to whether or not
13 what we do with New York City, which is a
14 creature of the state -- that isn't really
15 relevant to the legal arguments. Our
16 arguments relate to this is a state's right
17 issue, it relates to our relationship with
18 the federal government, and it's a foundation
19 of federal income tax that's been around for,
20 you know, like I said, over a hundred years.
21 So we don't think there's an issue there.
22 ASSEMBLYMAN OAKS: Thank you.
23 CHAIRWOMAN YOUNG: Senator Krueger.
24 SENATOR KRUEGER: Good morning. I
59
1 think this will be my round one. I have a
2 few rounds, probably.
3 Following up on these questions about
4 some of the scenarios that you're exploring
5 for the 30-day amendments to again, as you
6 described, and I completely agree, try to
7 assure New Yorkers that under the new federal
8 tax scenario, they're not actually losing
9 deductibility. So you've heard questions
10 about a number of the proposals.
11 Am I right that many of these
12 proposals can in fact be made at the option
13 of the taxpayer? So that, for example, the
14 charitable deduction instead of school or
15 property taxes as an example. I think
16 there's some concern that you're hearing, are
17 we putting people in a situation that may be
18 too complicated for them or may not fit them
19 or may be defined as a new burden for them?
20 As opposed to what I believe the goal of the
21 state is, to try to protect their income and
22 to not have $14 billion more going to the
23 federal government.
24 So are there a number of the scenarios
60
1 that actually can be at taxpayer option
2 chosen?
3 DOB DIRECTOR MUJICA: Thank you.
4 So yes, there are different options.
5 So there are options where some of them could
6 be at the employer opt-in level and at the
7 taxpayer opt-in level as relates to the
8 charitable contribution.
9 So to your point, we don't want to
10 force anyone, necessarily, into situations.
11 Where we can create optionability, if you
12 will, then we will. So we're looking at
13 that. Within the confines of the law, if
14 we're allowed to do. That's what we're
15 trying to do.
16 So there will be options, and then
17 there will be some determination as to
18 whether or not we have to say this is
19 necessarily mandatory.
20 But to your point, there is a level of
21 financial literacy that's necessary. It gets
22 complicated, right? There are individuals
23 who it would be in their best interest to
24 itemize, but they choose the standard
61
1 deduction every year because it's just
2 easier. So we get that. And that's
3 definitely something that we're considering.
4 But creating options is something that
5 we're very seriously looking at right now.
6 SENATOR KRUEGER: And an additional
7 concern that was raised, and I don't think
8 anybody asked it yet this morning, if you go
9 down the path of reducing pay to people -- so
10 shifting the -- to payroll taxes, is there a
11 potential that you're changing the formula of
12 what their eligibility for pensions would be
13 after they finish working, and can we make
14 sure we are not penalizing people's pensions
15 in the future by trying to help with a
16 problem now?
17 DOB DIRECTOR MUJICA: So the answer is
18 yes. So I think that is we would have to
19 look at those other ancillary impacts and
20 make changes, potentially, to current state
21 law to reflect this. So if there was that
22 change, or if there was a reduction, then you
23 would make those changes to make sure that
24 someone was held harmless. So we're looking
62
1 at those changes as well.
2 And I think that's why as you go down
3 the list of things that make this
4 challenging, we think we're addressing each
5 one and will come up with ways to fix it.
6 Again, we start from the premise that
7 we can't do nothing, so we have to do
8 something. Let's figure out how to do it
9 with the fundamental goal of reducing
10 people's taxes and their burden.
11 SENATOR KRUEGER: And on that same
12 theme, so the question was already raised
13 about people who get nonwage income --
14 interest dividends, et cetera -- the payroll
15 versus PIT won't -- that won't solve it for
16 them.
17 But my understanding is there's also
18 several million New Yorkers who are actually
19 so low-income they don't owe federal taxes.
20 They wouldn't fall into this, you know,
21 paying more, paying $14 billion more because
22 of lack of deductibility, but they might get
23 caught up in a lowering of wages without a
24 tax benefit under a couple of the scenarios.
63
1 Is there a way to assure us that we
2 could apply one of these or multiple of these
3 payroll options where we aren't actually
4 penalizing low-wage workers?
5 DOB DIRECTOR MUJICA: Yes. So one of
6 the options is just creating thresholds, too.
7 So we talked about if you leave some version
8 of a PIT in place, also then whatever we do
9 on the employer side, limiting it to incomes
10 or salaries of a certain level. And that
11 would largely deal with the issue that you
12 described.
13 And for the nonwage earners, we're
14 looking at that as well. Again, that goes to
15 the premise where before, it didn't matter
16 how you were organized as a business because
17 your state and local -- you could deduct
18 state and local taxes as an individual, you
19 can deduct state and local taxes as a
20 business or a corporation equally.
21 The federal law changes that by saying
22 you can't deduct state and local taxes as an
23 individual; however, you can still deduct it
24 as a business. So there are business
64
1 entities that pay taxes through the personal
2 income tax side, no longer deductible. If
3 they had organized a different way, perhaps,
4 then they would be able to deduct those
5 taxes.
6 So we're looking at ways for those as
7 well to be able have them be taxed instead on
8 the business tax side and then they could
9 maintain their deductibility.
10 SENATOR KRUEGER: And I'm at zero,
11 but just a quick follow-up on that. And
12 we're also looking at ensuring that people's
13 Earned Income Tax Credit, if eligible, isn't
14 reduced in some way when we explore these
15 options; right?
16 DOB DIRECTOR MUJICA: That's right.
17 SENATOR KRUEGER: Thank you. I'll
18 come back. Thank you.
19 CHAIRWOMAN WEINSTEIN: Thank you.
20 A quick question about the -- one of
21 the -- proposed deferral of certain tax
22 credits. We had this discussion a little bit
23 during the housing hearing. What would be
24 the impact of the deferral of certain key
65
1 credits such as the low-income housing credit
2 on current and future affordable housing
3 development?
4 DEPUTY COMMISSIONER HILLER: The
5 budget proposes to defer those credits, but
6 the proposal includes providing for the first
7 2 million of those credits to flow through
8 immediately. So we're building on a model
9 that the state undertook in 2010. So we did
10 the same credit deferral in 2010. The
11 credits become banked, they are already
12 accrued for the taxpayer, just the payout of
13 those is deferred.
14 So we believe that the taxpayers can
15 book those credits for their future years.
16 CHAIRWOMAN WEINSTEIN: Thank you.
17 Senate?
18 CHAIRWOMAN YOUNG: Thank you.
19 I have a lot of follow-up questions.
20 Oh, I'm sorry, we'll let Jim Tedisco, Senator
21 Tedisco go first.
22 SENATOR TEDISCO: Thank you for your
23 service to our state and for being here to
24 testify and take some questions.
66
1 So yesterday, like everybody in this
2 room and in the state, I was waiting for the
3 snow in the morning. I got up, it was very
4 quiet. Got out of bed -- unfortunately, my
5 wife heard me. If she didn't say it once,
6 she said it a dozen times: When are you
7 going to go out in the driveway and clear it
8 out, get the snowblower out? I said -- and I
9 had a good answer -- duplication of services.
10 The snow hasn't stopped yet. Dodged a
11 bullet.
12 Got to work, she must have called me
13 three or four times. Duplication of
14 services, got to wait till it stops.
15 Unfortunately, I got home about 6:30,
16 7 o'clock, and of course she said, When are
17 you going to go out? When the snow stops.
18 It stopped in about a half-hour. At 7:30 I
19 put my boots on, went out there, took the
20 snowblower out. About a half hour into it I
21 was really thinking, wouldn't it be great to
22 take a vacation to sunny Florida or to one of
23 those sunny areas? But I also thought to
24 myself, I never want to leave the State of
67
1 New York because I love it like you do, like
2 most of people in this room. It's the Empire
3 State.
4 I think my question in relationship to
5 this and some of the things you've talked
6 about of our situation in New York State and
7 our taxes -- middle-class tax cut, great,
8 $4 billion. We could soon be becoming the
9 empty state, not the Empire State. And I
10 guess my question is over a 10-year period
11 we've lost a million individuals, migration
12 out of the State of New York; 190,000 last
13 year. Four or five states have that
14 situation, of the 50 states in the nation.
15 If things are so good with our tax
16 structure and it doesn't relate to the
17 situation related to taxes and mandates and
18 regulations, why are they leaving? Why are
19 they leaving?
20 DOB DIRECTOR MUJICA: So we've said
21 this before and the Governor has highlighted
22 this before. New York State has some of the
23 highest property taxes in the country.
24 Right? We know that. It's been long, many
68
1 years in the making.
2 One of the first things he did when he
3 came into office, working with the
4 Legislature, was enacted the property tax
5 cap. And that property tax cap has, over the
6 last seven years, reduced the growth in our
7 taxes to 2 percent a year or less, while the
8 rest of the nation's average growth is about
9 3.7 percent per year.
10 So we did that. We reduced income
11 taxes for -- on the middle-class income tax
12 cut, which is actually larger, if you look at
13 it as a percentage of taxes that we
14 collect and -- taxes that we collect compared
15 to the federal government is actually bigger
16 than what the federal government is doing for
17 New Yorkers, as a -- in comparison. He cut
18 middle-class taxes, cut corporate taxes,
19 eliminated taxes on manufacturers. Right?
20 So all of those things we're doing, and we've
21 done them.
22 How we got to a high-tax state over
23 many, many years when inflation was growing
24 by 4 percent, you had state spending growing
69
1 in excess of 5 percent per year annually.
2 Since the Governor's been in office, we've
3 been increasing spending at 2 percent a year
4 for the last seven years. So actually, over
5 the seven years, it's actually like
6 1.4 percent.
7 Why do you have high taxes? Because
8 you have high spending. When you control
9 spending, you can then lower taxes. That's
10 the promise he made when he came in, and
11 that's exactly what he's done. Control
12 spending, then you have additional revenues.
13 What do you do with those additional
14 revenues? You're lowering taxes. Why do you
15 want to lower taxes? Because of your point:
16 People may be impacted by high taxes.
17 So the Legislature, working with the
18 Governor, over the last seven years have done
19 all of these things to make it better and
20 continue to control spending. The federal
21 government comes and says, Oh, we think
22 you're a high-tax state, so we're going to
23 raise taxes on you even further. Right?
24 Under the principle that -- they say is that
70
1 New York is -- we're subsidizing New York.
2 It's false, right?
3 SENATOR TEDISCO: I'm going to have to
4 interrupt you, because I've only got a minute
5 left.
6 DOB DIRECTOR MUJICA: Yeah.
7 SENATOR TEDISCO: But that tax bill
8 has gone into effect --
9 DOB DIRECTOR MUJICA: It's a loaded
10 question, right, because --
11 SENATOR TEDISCO: Well, you're loaded
12 for the rest of my time. Can I just ask
13 another question? Because you're
14 filibustering just a little bit. I
15 appreciate your answer --
16 DOB DIRECTOR MUJICA: But why are they
17 leaving? They're leaving because there were
18 high taxes for a long time? Perhaps. But
19 we've lowered those taxes. The federal
20 government came in and just raised the taxes
21 on New Yorkers. So that's the answer. And
22 the answer is if we have high taxes, don't
23 raise the taxes on New Yorkers.
24 SENATOR TEDISCO: But they haven't
71
1 raised the taxes yet until next year. We
2 won't feel that till next year. We lost
3 close to 200,000 in the past year.
4 Very quickly, because my time is
5 limited here, 45 or 44 other states aren't
6 affected by this, apparently, because they're
7 not a part of that lawsuit. What's the
8 chance that we're going to win a lawsuit when
9 44 or 45 other states don't have the high
10 taxes we have, don't have the exemptions or
11 need the exemptions because they don't have
12 the high taxes?
13 DOB DIRECTOR MUJICA: Well, I think
14 other states don't sue because they didn't
15 get hurt. So if you're targeting --
16 SENATOR TEDISCO: Right. But how are
17 you going to win when 80 percent of the
18 nation, or 90 percent, isn't impacted in the
19 way you've said it?
20 DOB DIRECTOR MUJICA: Well, I think
21 most lawsuits don't have -- every single
22 person are not on them, right? You only need
23 one aggrieved taxpayer, a couple of aggrieved
24 parties to make the case and then win the
72
1 lawsuit, which affects everyone. So you
2 don't need everyone to join into the lawsuit.
3 And frankly, people who aren't aggrieved are
4 not suing.
5 Again, we said New York is targeted,
6 12 other states are targeted. New York gives
7 the federal government more money than anyone
8 else in the country, and the federal
9 government wants to take more from New York,
10 and we want to stop that.
11 SENATOR TEDISCO: Thank you.
12 CHAIRWOMAN WEINSTEIN: Thank you.
13 Mr. Oaks.
14 ASSEMBLYMAN OAKS: Yes, thank you.
15 Just following up a little bit where
16 we were talking before, have we done any
17 study, or have you, related to regional
18 impact, regions of the state? You know,
19 you've done it by saying "in total." But
20 just the impact of the federal tax law,
21 either positively or negatively.
22 DOB DIRECTOR MUJICA: I think we know
23 where there's higher income taxes or there's
24 higher property taxes, they're impacted less
73
1 {sic} than other parts of the state. Right?
2 So we know that.
3 The higher the income taxes, the
4 higher the home values, you're impacted more.
5 So we know that. And you know, you know, if
6 you look at the congressional vote, right,
7 where it came from. So you can see certain
8 regions are impacted more than others. So we
9 know that.
10 But you have to look at the state in
11 total. Because again, you have the vast
12 majority of the personal income tax revenue
13 comes from New York City, Nassau, Suffolk,
14 Westchester and the Hudson Valley. And to
15 Senator Tedisco's point, if those people
16 leave the state, we lose money. And we need
17 that money to fund education statewide,
18 Medicaid statewide.
19 So that's the concern. The concern is
20 you can't say, well, it didn't affect one
21 part of the state so it shouldn't matter. It
22 affects the state because the revenues come
23 from the entire state. And if one part of
24 the state is hurt and it impacts -- their
74
1 home values go down 10 percent, their
2 property taxes go up, their income taxes go
3 up, and we're less competitive to the other
4 states -- some people cite Florida -- the
5 federal law made us that much less
6 competitive than those other states.
7 So if it impacts any part of the
8 state, it's going to impact us. And if you
9 impact the part of the state that produces a
10 lot of the revenue, then it's really going to
11 impact the whole state. So I think it's not
12 just a matter of how it impacts that
13 individual on their taxes, but it's how it
14 impacts potential state revenues, and that's
15 where we're really at risk.
16 ASSEMBLYMAN OAKS: One of the things
17 I'd like to jump to is dealing with issues
18 around the opioid crisis in the state. And
19 certainly I agree with efforts to try to
20 respond to that.
21 Of course one of the proposals in the
22 budget is to raise revenues through a tax
23 that would be created on that. And one of
24 the things I did see, that 12 states tried to
75
1 do that last year, but it's pretty complex.
2 And looking at the overall structure of how
3 drugs move through the system and then who's
4 using them. And I guess I have a couple of
5 questions. None of those other states
6 actually ended up doing it.
7 But we have -- it also falls to we're
8 taxing treatment by doing that, because
9 people who are accessing some of those
10 treatment drugs, those drugs are also being
11 taxed in the midst of this.
12 So I guess just some questions looking
13 at -- and again, it's a complex way -- why
14 the other states didn't end up doing it, it
15 got, you know, very difficult and maybe some
16 unintended consequences came out of it.
17 So I guess just questions on why would
18 it apply to people or the drugs that are used
19 for people in treatment?
20 DEPUTY COMMISSIONER HILLER: The
21 opioid surcharge proposal would be applying a
22 surcharge on the first sale into New York
23 State of an opioid. The funds being
24 generated by that surcharge are being
76
1 dedicated to fund opioid treatment programs
2 that are paying for those drugs, and so those
3 programs will be whole. It's the ultimate
4 goal here to impose a surcharge that will
5 flow to the manufacturers of opioids, and
6 where at the end stream it's being used for
7 drug treatment programs, the surcharge is
8 being dedicated to support exactly those
9 programs.
10 ASSEMBLYMAN OAKS: So, you know -- and
11 I guess I understand that some -- but, you
12 know, hospice, because they're end users,
13 they're paying for it for treatment.
14 You're suggesting, though, those
15 dollars -- I mean, in hospice care it
16 wouldn't be for -- you know, they wouldn't be
17 getting money for treatment or, you know, for
18 other uses -- cancer treatment and others
19 where there's legitimate postsurgical pain
20 and whatever, where I think the prescription
21 of those is legitimate. Where we've gotten
22 into problems is certainly in overuse.
23 But so you were just talking about the
24 structure. So who is the target? Because --
77
1 is it the manufacturer? My understanding was
2 the tax would be more -- in most cases, the
3 provider would be paying the tax.
4 DEPUTY COMMISSIONER HILLER: The tax
5 is structured as a tax on the first sale into
6 New York State. That's the first point where
7 our state tax code can reach the chain of
8 commerce for a drug. So if the manufacturer
9 is selling directly into the state, the
10 manufacturer would be paying the surcharge.
11 If a manufacturer sold to a distributor who's
12 selling into the state, that distributor
13 would be paying the surcharge.
14 That's as high in the chain of
15 commerce as the state can reach. But the
16 goal is to reach as high into the chain of
17 commerce as we can.
18 CHAIRWOMAN YOUNG: Thank you.
19 Quite a few follow-up questions.
20 First of all, to Director Mujica, you
21 said there are 3 million taxpayers in the
22 state who pay property taxes, and there are
23 1.7 above the $10,000 per year line, they're
24 paying more than $10,000 a year in property
78
1 taxes. So the question is, does that mean
2 that 1.3 million taxpayers are getting a tax
3 break?
4 DOB DIRECTOR MUJICA: Let me clarify.
5 It's 3.3 million taxpayers who presently
6 itemize. 1.7 million of those pay state and
7 local taxes in excess of 10,000.
8 CHAIRWOMAN YOUNG: Right.
9 DOB DIRECTOR MUJICA: So some of those
10 will maintain state and local tax
11 deductibility to a certain degree. There's a
12 lot of other factors, but presumably they
13 have below $10,000 they can still claim
14 deductibility. So some of those, right, are
15 still being able to deduct their taxes and
16 presumably the combination of both is below
17 the $10,000 threshold. But we have 1.7
18 million New Yorkers whose state and local
19 sales taxes are above the $10,000 threshold,
20 and that's the 14 --
21 CHAIRWOMAN YOUNG: So the remainder
22 from the 1.7 theoretically would be getting a
23 tax break from the federal tax reform.
24 DOB DIRECTOR MUJICA: There are other
79
1 factors, right, so I can't speak to whether
2 or not they're going to get -- and what that
3 dollar value is. It could be dollar one,
4 dollar two.
5 But the bigger metric that we were
6 just using to come up with that number is
7 just state and local taxes. So presumably
8 some of them fall under the $10,000, so
9 they're still able to maintain state and
10 local tax deductibility -- at least they're
11 maintaining their state and local tax
12 deductibility. But the remainder don't.
13 CHAIRWOMAN YOUNG: So we're on a tight
14 time schedule now, and the 30-day amendments
15 are set to be due on February 15th. And
16 you're talking about totally restructuring
17 our tax system in New York, and it sounds
18 quite complicated, from what you said;
19 somewhat confusing, potentially. And will
20 all of these proposed changes be included in
21 the 30-day amendments? Because I would hate
22 to get up close to the budget deadline and
23 not have details on what the Governor is
24 proposing and then have to go through all
80
1 these complicated changes to the tax law and
2 not have enough time to fully vet those
3 changes.
4 DOB DIRECTOR MUJICA: Yeah, I think
5 the Governor understands that timeline as
6 well, and that's why we've been working hard,
7 the Tax Department has been working harder
8 trying to draft -- have these pieces drafted
9 so we can give you detailed language with the
10 30-day amendments. Because we recognize that
11 it is -- you will need time to deliberate, we
12 will need time to work through the issues.
13 So the anticipation is that you will
14 have language for the vast majority of these,
15 if not all, on the 30 days -- for the
16 30-days.
17 CHAIRWOMAN YOUNG: Thank you, Director
18 Mujica.
19 Now I would like to follow up on a
20 line of questioning that Assemblyman Oaks
21 asked about, and it's on the first sale of
22 opioid drugs in the state. And he was
23 getting to this. And I know that there's
24 language included in the Governor's proposal
81
1 that says it won't be passed along to
2 consumers. But how can you ensure that?
3 If you're charging more taxes, a new
4 surcharge on the first sale of opioid drugs
5 in the state, isn't it very likely that a
6 drug manufacturer would pass that along to
7 consumers?
8 DEPUTY COMMISSIONER HILLER: Yeah, I
9 think that there are competitive factors that
10 drive drug pricing now. And to the extent
11 that we're looking at imposing a surcharge
12 fairly high in the chain of commerce, we're
13 certainly -- you know, certainly the
14 intention of the bill is to make the cost of
15 sales into New York a higher cost for those
16 opioid manufacturers.
17 CHAIRWOMAN YOUNG: Right. But then
18 who pays for that? Just the manufacturer?
19 If it costs more to manufacture a drug,
20 usually it's passed along to the consumers.
21 Am I correct?
22 DEPUTY COMMISSIONER HILLER: I think
23 in the case of opioids that, you know, as
24 long as we can provide for end-uses that are
82
1 important such as drug treatment, the notion
2 that we're increasing the cost of opioids is
3 a public policy goal here, I think.
4 CHAIRWOMAN YOUNG: Yeah, but -- so I
5 have a lot of follow-up on that. Because as
6 you know, in the Senate we have been very,
7 very aggressive in passing a lot of policy to
8 deal with the opioid and heroin crisis. We
9 pushed last year for $227 million to be
10 included in the budget. That was above what
11 the Governor originally proposed by a lot of
12 money. And there's concern about the costs
13 heading downstream on these, such as
14 pharmacies, for example. And I had a hospice
15 come to me yesterday, just this week, and
16 they are scared to death of this change
17 because obviously, all of a sudden, with
18 these high taxes and this surcharge, there's
19 going to be a disincentive for these opioid
20 manufacturers to actually sell in New York.
21 Obviously, we've had a crisis, people
22 have abused opioids, and that's created a lot
23 of problems that we face now. But if it
24 creates a shortage, how does that affect
83
1 entities such as hospice that need to have
2 those opioid drugs to make sure that people
3 are comfortable as they are going through the
4 end of life and suffering?
5 So how can you ensure that
6 manufacturers might say, Okay, New York,
7 you're going to hit us with this huge
8 surcharge, we're just not going to sell our
9 drugs in New York State?
10 DEPUTY COMMISSIONER HILLER: Number
11 one, I think the market for opioids in
12 New York is a strong one, and I don't believe
13 that any of our health policy experts
14 anticipate that outcome.
15 I think the goal of this proposal is
16 to impose a modest surcharge that will fund
17 critical opioid treatment programs, and that
18 the cost of those treatment programs should
19 be borne, to the extent that we can achieve
20 it, on the manufacturers of opioids.
21 CHAIRWOMAN YOUNG: I still have some
22 deep concerns about this particular proposal
23 and a lot of the tax increases. As you know,
24 our conference has been working very hard to
84
1 make New York more affordable, not less
2 affordable.
3 Just switching gears, I know you're
4 actually talking about the Brownfield Cleanup
5 Program as having a deferment, and also the
6 Low Income Housing Tax Credit. So I just
7 want to go over a little bit of history here.
8 As you know, in the 2016 enacted
9 budget, following more than two years of
10 negotiations, the state made a significant
11 commitment to clean up the environment, to
12 provide a mechanism to create affordable
13 housing by extending and amending the
14 Brownfield Cleanup Program. Following two
15 more years of negotiations, the state again
16 made its commitment to affordable housing
17 clear by including $2.5 billion toward a
18 multiyear plan to provide 100,000 units of
19 affordable housing.
20 However, this year's Executive Budget
21 proposal threatens all of those advances and
22 future development with language to delay
23 payment of Brownfield and state Low Income
24 Housing Tax Credits. You're talking about
85
1 some actions that were taken in 2010. I
2 would like to remind you that 2009 and 2010
3 were very bad years for the state, and a lot
4 of people in the communities across the
5 state, people investing in our state felt
6 that the state actually broke its promises.
7 So what is the rationale behind the
8 deferment, number one? And for example, on
9 the Brownfield Cleanup Program -- and I'll be
10 asking this at the EnCon table too. But how
11 many projects will be affected by this
12 deferment? Will it stop these projects in
13 their tracks? Because all of a sudden you're
14 taking away something that people were
15 counting on to clean up these contaminated
16 sites.
17 DEPUTY COMMISSIONER HILLER: The
18 proposed business tax credit deferment in the
19 Executive Budget does not change the
20 entitlement to credits. Taxpayers will
21 continue to accrue credits as they are
22 accruing them now. It's changing how the
23 credits get paid out over time. But the
24 entitlement to that credit is unchanged under
86
1 this proposal.
2 CHAIRWOMAN YOUNG: Right. But it's
3 deferring, it's delaying it. Do you think
4 people can afford to invest in these projects
5 if it's deferred down the road? They're
6 counting on that investment now, that
7 commitment now from the state.
8 DEPUTY COMMISSIONER HILLER: I think
9 the proposal contemplates that the first
10 $2 million of each credit will flow in order
11 to, you know, be that -- that will cover most
12 tax credit claims. And the -- because the
13 entitlement to that credit is defined under
14 current law, taxpayers can book that credit
15 that they have earned on their books for
16 future years.
17 CHAIRWOMAN YOUNG: As I asked, could
18 you give me the number of projects that would
19 be impacted by this proposal?
20 DEPUTY COMMISSIONER HILLER: I don't
21 have that number in front of me. We can
22 certainly try to get that.
23 CHAIRWOMAN YOUNG: Just following up
24 on the Low Income Housing Tax Credit, I have
87
1 a particular interest in this, there's been a
2 disruption in federal pricing, the federal --
3 there's been a disruption in pricing federal
4 low income housing tax credits due to the
5 comprehensive federal tax reform. And you're
6 aware of that. The industry is reporting
7 that tax reform may devalue the credit since
8 it is tied to the corporate tax rate. The
9 lower the tax burden, the less credits will
10 be worth to investors. And that's of deep
11 concern. And I've had a bill that I've
12 carried in the past that would bifurcate the
13 federal from the state's low income housing
14 tax credits.
15 The state low income tax credit could
16 be a resource for filling financial gaps with
17 the federal credit. However, the Governor's
18 budget proposes delaying the state credit for
19 two years, as we discussed. This means
20 investors would not be able to remit the
21 credit right away, which could have a
22 detrimental effect on its value. A similar
23 measure passed in 2009-2010, as you pointed
24 out, and had a reverberating effect on the
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1 program. Partnerships were broken that
2 caused financial losses for investors and
3 resulted in a lack of faith in the program,
4 which is the wrong way to go.
5 We are now hearing that many investors
6 now price risk into their operating
7 agreements. Stipulations provide that if the
8 credit is delayed, the developer will pay 10
9 cents on every dollar, which is
10 extraordinarily problematic. This can create
11 an equity hole for the developer when they
12 move from construction financing to permanent
13 financing. The developer must make up those
14 gaps, which can have an impact on housing
15 affordability. And the Legislature and the
16 Governor have prioritized housing
17 affordability.
18 So can you provide a list of state
19 low-income-housing tax projects that are in
20 the pipeline so we know how many of these
21 projects are going to be so negatively
22 impacted?
23 DEPUTY COMMISSIONER HILLER: Again,
24 the Tax Department doesn't have that list.
89
1 We can certainly try to get one.
2 CHAIRWOMAN YOUNG: If you could get
3 it, that would be very helpful.
4 Just switching gears, the Executive
5 Budget contains a proposal to close the
6 so-called carried interest loophole by adding
7 17 percent, called a fairness fee, to certain
8 compensation earned by hedge fund managers.
9 The proposal would only go into effect in the
10 event that surrounding states pass
11 substantially similar legislation. Wouldn't
12 substantially similar mean that our neighbors
13 could pass similar legislation with a much
14 lower fairness fee and draw businesses away
15 from New York?
16 DEPUTY COMMISSIONER HILLER: The
17 proposal would take effect here if our
18 neighboring states enacted substantially
19 similar legislation. The proposal doesn't
20 call for identical legislation because our
21 neighboring state have different structures
22 to their tax code, so it can't just be an
23 exact duplicate.
24 But I believe that the proposal
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1 contemplates a similar level of a fairness
2 fee. There's nothing to stop our neighboring
3 states from enacting taxes of their own at
4 whatever levels they choose. But our goal
5 here is to address the carried interest
6 loophole but make sure that we're advancing
7 it in a way that doesn't reduce our
8 competitiveness as compared to our neighbors,
9 by ensuring that we work together with our
10 neighbors to address this issue.
11 CHAIRWOMAN YOUNG: Where are we at
12 with dealing with other states?
13 DEPUTY COMMISSIONER HILLER: I believe
14 there are conversations happening with other
15 states. I don't know that this individual
16 proposal is moving forward or not moving
17 forward, because frankly those conversations
18 are above my pay grade.
19 CHAIRWOMAN YOUNG: Switching gears
20 again, the Executive Budget proposes a
21 $25 million retroactive tax increase on two
22 upstate gaming facilities. So the question
23 is, how can the state retroactively impose a
24 tax increase of this magnitude on two upstate
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1 facilities just a couple of years after
2 giving them tax parity with commercial
3 casinos that they are forced to compete
4 against?
5 DEPUTY COMMISSIONER HILLER: I would
6 have to say that that's outside the Tax
7 Department's expertise. Those taxes are
8 managed by the Gaming Commission.
9 CHAIRWOMAN YOUNG: Okay. So we'll
10 have to follow up on that.
11 And finally I wanted to ask about --
12 there's a proposal regarding -- so this
13 year's Executive Budget includes to extend
14 the sales tax to online marketplace providers
15 such as Amazon and Etsy. The Supreme Court
16 recently agreed to hear the case South Dakota
17 vs. Wayfair, which will address this issue on
18 the federal level.
19 So I think that the arguments are
20 being heard in April of 2018, the court is
21 expected to rule in June of 2018. Wouldn't
22 it make more sense to wait and have this
23 outcome of the case become apparent before
24 the state takes action?
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1 DEPUTY COMMISSIONER HILLER: I mean,
2 we're certainly watching that case closely.
3 That case relates to whether the standard for
4 nexus, at what point a state can impose a
5 sales tax collection obligation on a business
6 that's not necessarily in New York State.
7 There are limitations on when we can and
8 can't impose a sales tax obligation. And
9 we're watching closely that Supreme Court
10 case that has the potential to change the
11 standard and allow states to reach businesses
12 that are outside their borders more easily.
13 But the proposal in the Executive
14 Budget is a little different. The proposal
15 is looking to the marketplaces that are
16 facilitating sales. We're looking to
17 marketplaces that meet the current nexus
18 standards already, but we're only looking to
19 impose collection obligations on marketplaces
20 that have nexus to New York State.
21 But the idea is to impose the
22 collection responsibility where the money is
23 handled. When I go to Amazon and I purchase
24 from Amazon, Amazon is collecting sales tax
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1 and remitting it to New York State. But in
2 the fine print on my screen, it may that be
3 the sale I feel like I'm purchasing from
4 Amazon is really being fulfilled by some
5 third-party vendor. And Amazon may be
6 collecting tax on that sale and remitting it
7 to the third-party vendor, who then we hope
8 would send it to New York State.
9 But the idea of the marketplace
10 proposal is to require the marketplace that
11 is facilitating the sale, that is making the
12 sale possible, that is taking in the money,
13 that is processing the transaction, be the
14 entity that is required to collect and remit
15 the sales tax. Because that's where the
16 functionality for that responsibility lies.
17 CHAIRWOMAN YOUNG: Right. But this
18 Supreme Court decision may have an impact on
19 anything that the state does. So the
20 question is, why not wait? Because we're
21 looking to reverse a '92 decision, Quill vs.
22 North Dakota, and -- which that basically
23 says that the -- you know, it deals with
24 purchases over the internet, and I know South
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1 Dakota is arguing that the 1992 ban on online
2 tax collection is obsolete. I know all that.
3 But why not wait just a few months and
4 see what the Supreme Court does? Because
5 that could impact what we're doing here in
6 the state.
7 DEPUTY COMMISSIONER HILLER: Yeah,
8 again, you know, we're watching that case
9 very closely because it creates the potential
10 for us to impose sales tax collection
11 responsibilities on out-of-state vendors that
12 are doing substantial business in New York
13 State and that are competing against New York
14 brick-and-mortar businesses.
15 Even if that Supreme Court case goes
16 in favor of states' ability to reach
17 out-of-state vendors, we still think that the
18 marketplace proposal is the right proposal
19 for managing the collection of sales tax from
20 these large online marketplaces, because
21 that's where the money is collected. It's
22 Amazon that is taking my credit card, that is
23 billing my credit card for the sale. It's
24 not the third-party vendor whose goods are in
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1 an Amazon warehouse waiting for Amazon for
2 ship them to me.
3 And because the marketplace is the one
4 that's processing the money, we believe that
5 that is the right place to impose the
6 collection responsibility, regardless of
7 whether nexus expands to other vendors. We
8 still think that the vendors who have nexus
9 to New York State should be the ones who have
10 that responsibility.
11 And with that comes some relief for
12 the small vendors who may be selling goods on
13 that marketplace. Right now those
14 vendors are liable for the sales tax that
15 they may or may not have been collecting or
16 remitting. And when we come across them in
17 our audits, they have to come up with the
18 money and pay us the sales tax that they
19 should have been collecting. When the
20 marketplace is held responsible for that
21 collection and remission responsibility, they
22 can now relieve those small vendors of the
23 obligation to do that themselves.
24 CHAIRWOMAN YOUNG: Thank you.
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1 I just want to finish up by saying
2 that there are a lot of revenue actions in
3 the Governor's budget that our conference,
4 the Senate Republican Conference, is very
5 concerned about. And as Director Mujica
6 pointed out, we have worked together very
7 successfully over the past few years to
8 reduce the tax burden on New Yorkers. And
9 these revenue actions are actually tax and
10 fee increases.
11 So it does raise a lot of concerns in
12 our conference, and I just wanted to make
13 that statement.
14 Thank you.
15 CHAIRWOMAN WEINSTEIN: Mr. Oaks has a
16 follow-up question.
17 ASSEMBLYMAN OAKS: Yeah, actually
18 Senator Young, I was thinking, might have
19 covered this one too because she covered most
20 of the tax implications. But one of them
21 that she didn't mention that I'd like to just
22 ask a quick question on, the health insurers'
23 14 percent surcharge that the Governor
24 discussed and used as his justification of
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1 saying, you know, they're going to see a
2 windfall from the federal changes, and so
3 basically we're going to do the surcharge to
4 take those dollars away.
5 I'm just wondering if in that
6 calculation there was used determination of
7 just how the feds are going to treat them in
8 their deductions and what they do as income
9 -- you know, how they treat that -- so that
10 it may make that different than what -- you
11 know, simply taking a percentage calculation
12 to do that.
13 So just --
14 DEPUTY COMMISSIONER HILLER: I mean, I
15 think the issue here is that the rates that
16 these health insurers are allowed to charge
17 were set based on the prior tax code. And so
18 the rate reduction that they're receiving as
19 a result of the federal tax changes is on top
20 of the tax allowance that was built into
21 their rate schedule for the upcoming year.
22 And so the goal here is to recapture that
23 gain, because that's on top of the
24 rate-setting process that has already taken
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1 place this year, based on the tax code as it
2 existed before December.
3 ASSEMBLYMAN OAKS: The issue I guess
4 just is as we go forward and look at that, we
5 just need to make sure we're calculating in a
6 way that's appropriate with trying to meet
7 the goal that you are.
8 DEPUTY COMMISSIONER HILLER: Of
9 course.
10 CHAIRWOMAN YOUNG: Senator Krueger.
11 SENATOR KRUEGER: Thank you.
12 So actually following up where Senator
13 Young I think ended -- it's interesting, she
14 and I have questions about many of the same
15 things, but we land in different place on the
16 answers. So following up -- or our
17 conferences do.
18 CHAIRWOMAN YOUNG: That's shocking.
19 SENATOR KRUEGER: Shocking.
20 (Laughter.)
21 SENATOR KRUEGER: So I am actually a
22 big supporter of the internet marketplace
23 tax. And I think what's important -- and
24 Ms. Hiller started to address it -- is for
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1 us, in the same way as in the discussion
2 about what the feds just did in tax law and
3 how we need to adjust perhaps the way we've
4 been thinking about taxes for a hundred years
5 because of what the feds did, when it comes
6 to the internet marketplace -- and I would
7 argue that the world we're living in, we need
8 to completely reevaluate how we think about
9 taxes and policy when it comes to internet
10 business.
11 So in fact when people talk about
12 crime today, they're talking about cyber
13 crime, a completely different set of issues
14 than police and DAs are used to. And when
15 you're talking about business models today,
16 and how to regulate and tax them, you have to
17 ask the questions what makes sense in a world
18 where everything is on the internet.
19 So the fact is -- and thank you for
20 explaining it the way I understand it --
21 right now there's a competition going on
22 between bricks-and-mortar stores who are in
23 our communities and hire people from our
24 neighborhoods and pay all kinds of local
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1 taxes and sales tax when you go and shop
2 somewhere versus the world of internet
3 shopping, which I do and more and more of the
4 population does, but it actually reduces our
5 taxes to our localities and our counties and
6 our state and creates an uneven playing
7 field.
8 And that what is so important to
9 understand with the internet tax proposal --
10 and again, we do need to see where the
11 Supreme Court goes or doesn't go to in fact
12 expand and address this issue in a larger
13 level. But it's not a new tax on people.
14 It's a tax that sometimes is being collected,
15 it's just not being paid.
16 So it makes it an even more uneven
17 playing field. And I hear from our local
18 governments and our county governments that
19 their sales tax revenues are plummeting,
20 there's fewer stores -- we have all kinds of
21 empty storefronts in Manhattan because nobody
22 is going shopping in stores. And yet we
23 haven't caught up with it with the tax
24 policy.
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1 So I applaud the Governor for that
2 proposal, and I hope we'll go forward. But I
3 want to emphasize it's not a new tax, it's an
4 equal distribution and fair tax policy.
5 But on that note, I also want to
6 highlight and go further than I think Senator
7 Young went about the concerns around the tax
8 credit deferrals. And she talked
9 specifically about the Low Income Housing Tax
10 Credit, which I completely agree with her on.
11 At a previous hearing it also came up
12 around -- I think she talked about
13 brownfields but also about historic
14 rehabilitation tax credits. And I just want
15 to highlight as well we're even putting tax
16 credits on green energy proposals that the
17 Governor had just implemented.
18 So for example, it puts a limit on the
19 electric vehicle charging infrastructure,
20 even though the Governor has a commitment of
21 10,000 EV chargers installed by 2020. And we
22 were supposed to hit the 3,000 mark this
23 year, and I don't think we're going to, but
24 we still have the 10,000 mark we should hit
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1 by 2020. But again, deferring the tax
2 credit -- even though it's a deferment, not a
3 taking away, can absolutely impact whether
4 the businesses who have gone in to commit to
5 expand our electronic vehicle infrastructure
6 think that they actually can afford to go
7 forward with this kind of infrastructure
8 change and the sustainable and green energy
9 changes.
10 So whether it's for Tax & Finance or
11 perhaps for Mr. Mujica, I get what the
12 Governor is proposing, to defer because we
13 have a financial problem. But why did we
14 look -- or how did we look at these? So some
15 of these, which seemed to be so important
16 from a good public policy perspective, are on
17 the list. And yet we've got a tax
18 expenditure budget that totals almost $30
19 billion, I believe. And we didn't look at
20 most of the tax credits and exemptions that
21 are within that $30 billion tax expenditure
22 report or budget. And some of those things I
23 don't think we've looked at for 10 or 15
24 years, and I can't see a good justification.
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1 So why did we decide on these when a
2 number of them seem to be critical good
3 public policy tax credits, but we're spending
4 $500 million a year on a golden bullion sales
5 tax exemption. One, why? And two, why not
6 defer some of theirs? Why not defer some of
7 the $1.5 billion we write off in tax
8 exemptions for the petroleum products in this
9 state? There seems to be a disconnect
10 between public policy thinking and revenue
11 thinking. So I'm just wondering.
12 DOB DIRECTOR MUJICA: I think we --
13 actually, the vast majority of the business
14 tax credits are the ones that are deferred.
15 We can go through with you, you know, if
16 there are decisions made. But to address
17 your issue, we didn't necessarily pick and
18 choose. There are a few that we took off
19 that were very recent. Otherwise, the vast
20 majority of them are there.
21 Some of the ones you just mentioned
22 are not really things we can defer at all,
23 just because the implications of them are
24 not, and the tax expenditure report doesn't
104
1 necessarily accurately reflect them. So we
2 can go through those. The gold bullion thing
3 is not a real tax credit, if you will. Every
4 state has it. It just relates to the sale of
5 gold overall. No one would sell it here in
6 the state.
7 So we can go through all of those with
8 you. To your point, we didn't -- we tried to
9 be agnostic to these individual programs, and
10 we're not cutting them, which I think was a
11 key distinction that Amanda mentioned, right?
12 We're just deferring them. We're also
13 allowing the first 2 million to flow through.
14 So the first 2 million actually happens.
15 It's above 2 million, so the larger ones are
16 the ones that are deferred, and then those
17 will -- they'll be able to claim those
18 credits in three years.
19 So when this was done last time, a lot
20 of those we know that they still claim the
21 credits three years later, because three
22 years later they came and they claimed the
23 credits. So they didn't lose them. So
24 businesses can still maintain -- can keep
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1 that on their books and claim them later.
2 So that was the intent. We didn't go
3 through each individual one, we took most of
4 them and said we're going to defer all of
5 them, with the exception of only like a few.
6 A handful.
7 SENATOR KRUEGER: My time is up, so
8 I'll go a third round.
9 CHAIRWOMAN YOUNG: Okay, thank you.
10 Senator Savino.
11 SENATOR SAVINO: Thank you, Senator
12 Young.
13 A lot of the areas have been covered
14 by other members, but I want to go back to
15 the opioid surcharge, because I'm confused as
16 to how it would flow. And maybe if we hear
17 it one more time it will sink in.
18 So right now we'll take Oxycontin,
19 manufactured by Purdue Pharma. So Purdue
20 Pharma could sell it into New York State
21 through either hospices, nursing homes,
22 healthcare institutions. Or, more likely,
23 they're negotiating with pharmacy companies
24 like CVS Caremark.
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1 How would it affect them? Who would
2 pay the surcharge at that point then?
3 DEPUTY COMMISSIONER HILLER: Again,
4 the surcharge is on the first sale into
5 New York State. And that's really because,
6 for the same constitutional issues, we can
7 only reach that first sale into New York
8 State.
9 If the manufacturer is selling
10 directly into New York State, then the
11 surcharge would be applied to that
12 manufacturer. If the manufacturer is selling
13 to a distributor like CVS Caremark and then
14 CVS Caremark is selling it into the state,
15 then --
16 SENATOR SAVINO: Okay, so stop at that
17 point. How do we then prevent CVS Caremark
18 from passing the cost on to the consumers at
19 the counter in the form of an increased
20 copay?
21 Because I think we all agree we need
22 to do everything possible to reduce the
23 overreliance on opioids and the corresponding
24 effects that it's having on our state. I
107
1 think everyone agrees with that. It's just
2 what do we do to prevent them from passing it
3 on to the patients, who are already suffering
4 with the addiction issue? And what we do
5 know is if you make a product too expensive
6 for patients, they are going to turn to the
7 tried and the true and the cheap, and that is
8 heroin.
9 So I think we just have to be careful
10 that as we go down this road, that -- this is
11 more of a comment than a question -- that we
12 prevent them from passing it on to the
13 patient. Anything we can do to prevent
14 people from going into the black market is
15 important.
16 And on that issue, I want to turn
17 to -- it's a very small proposal in the
18 budget, it only produces $3 million this year
19 and $5 million annually thereafter. It would
20 be the health tax on vapor products. And the
21 Executive proposes to regulate and tax vapor
22 products in a similar manner as cigarettes.
23 Vapor products are defined as any
24 noncombustible liquid or gel regardless of
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1 the presence of nicotine.
2 Fine. But I think we need to exempt
3 the medical marijuana program. The vast
4 majority of patients that don't use
5 sublingual or oils use the vaporizing method
6 of delivery. The cost is already exorbitant
7 for patients in New York State because of the
8 size of the market, and we control the price.
9 I would just ask that we exempt that
10 vaporizing method for medical marijuana
11 patients.
12 Thank you.
13 DOB DIRECTOR MUJICA: Senator, just if
14 you could, just on the opioids, because I
15 know a couple have raised the same question.
16 There's two parts to this. One is,
17 there are some price protections in place for
18 consumers with regard to price, so we are
19 sensitive to that. The other part is there's
20 an alternative policy rationale for it, which
21 is also a deterrent.
22 So we all know that there's an overuse
23 of opioids, and the amount of prescriptions
24 that are being written are probably far more
109
1 than need to be. We also know that there are
2 many alternatives that a lot of
3 pharmaceutical manufacturers, hospitals are
4 practicing. They have non-opioid emergency
5 rooms now, they're using alternatives.
6 So -- also the desire here is also to
7 promote alternatives. So a deterrent,
8 necessarily, for opioids if you have to, but
9 there's an overuse problem. And imposing the
10 tax also might discourage some use and
11 promote some alternative pain relief as well.
12 Where the line is and what that does,
13 I think we have to work on that. But there's
14 an alternative policy rationale besides just
15 funding the programs.
16 SENATOR SAVINO: I agree totally with
17 that. I'm just -- from experience and seeing
18 it out there, if you push patients too far
19 too fast, they will not necessarily make the
20 best decisions.
21 But with respect to having an
22 alternative option out there, we do have one.
23 It's called medical marijuana. Unfortunately
24 it can't be used the same way, and it's
110
1 incredibly expensive.
2 So again, let me just reiterate. If
3 we could exempt medical marijuana patients
4 using vaporizing as the method of delivery, I
5 think that would be only fair to people who
6 are already paying a very high cost for a
7 product that's providing the relief that is
8 an alternative to opioids.
9 DEPUTY COMMISSIONER HILLER: We'll
10 certainly take a look at that.
11 I would note that the proposal to tax
12 vapor, you know, would put the administration
13 of the tax on vapor in the same section of
14 the Tax Law as the tax on tobacco products.
15 And medical marijuana, the distribution
16 structure for medical marijuana is very
17 tightly controlled and is outside the retail
18 chain that the cigarette taxes generally
19 apply to.
20 SENATOR SAVINO: I just mention it
21 because the language says "regardless of
22 whether nicotine is present." So I just want
23 to make sure it's the pen itself.
24 DEPUTY COMMISSIONER HILLER: We'll
111
1 take a look at that. But at the same time,
2 to provide some comfort, that tax structure
3 relates to tobacco distributors to tobacco
4 retailers. It's falling into that same tax
5 structure.
6 SENATOR SAVINO: Okay. Thank you.
7 CHAIRWOMAN YOUNG: Thank you.
8 Senator Tedisco, and then I have some
9 more questions.
10 SENATOR TEDISCO: I keep hearing this
11 over and over again. The last seven years,
12 we've -- everybody in the State of New York
13 pays less taxes. Well, that cannot be
14 possible, because there are some very
15 high-taxed communities in terms of the
16 property tax.
17 And if you tell me we're not
18 responsible, the state's not responsible for
19 property taxes -- I don't know where you
20 live, but when I get my property tax bill, it
21 has a line that kind of wised up to what's
22 going on: Mandates related to state, in
23 terms of the cost, 75 percent on my bill. So
24 telling me that in a state where we've lost a
112
1 million people over 10 years in population,
2 190,000 last year, is like saying you met a
3 man in the desert who's been there for seven
4 years. You take out the water, I'm going to
5 give you some water, and you put it in a
6 thimble and say: Drink and be well.
7 Clearly, we haven't reached a point
8 where we're reasonable now, or moderate now,
9 or competitive now, in relationship to that.
10 So I think that's a real concern to many of
11 my constituents.
12 You talk about the 1.7 million
13 individuals who go above that $10,000
14 threshold for income and property taxes. I'm
15 interested in that 1.7 million who are
16 meaningfully and profoundly impacted and who
17 are to some essence impacted. In that 1.7
18 million, I'm sure there's people who are $10
19 above the limit, $5 above the limit, $50
20 above the limit, $100 above the limit; it has
21 some little impact on them. But that's a
22 pretty large number, 1.7. I'd like to know
23 who are those individuals who can actually
24 move to the other side and do standardized
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1 and really come out as even as they were with
2 taking the specifics, itemizing. But if you
3 have any figures on that, where income levels
4 go above, really how they're impacted on
5 that.
6 And another question I have is this.
7 You said we shouldn't impact the part of the
8 state that provides the most revenues. Were
9 you talking about the individuals the
10 Governor was talking about, about a week or
11 two ago, when he said that the rich and
12 wealthy individuals in downstate are going to
13 leave the State of New York because of what
14 the federal government is doing? Because if
15 you're talking about that and the
16 administration is talking about that, them
17 leaving the state because of too progressive
18 taxes, you know, I see Walmart giving out
19 bonuses. I see a lot of these big businesses
20 and corporations giving out bonuses. If it's
21 going to be so negative for our rich and
22 wealthy and they're going to leave the state,
23 isn't that kind of talking out of both sides
24 of your mouth? Because last year we were
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1 told we cannot give or continue that $4.5
2 billion middle-class tax cut because we need
3 more progressiveness and we've got to keep
4 that so-called millionaire's tax. That
5 millionaire's tax was supposed to sunset last
6 year. We were told we can't live up to that
7 obligation we put forth.
8 Millionaires is -- some of the small
9 businesses or many of the small businesses of
10 New York State, those are the people who
11 provide, if not most, a tremendous amount of
12 the revenue. You know, on the one hand
13 you're saying we've got to have a progressive
14 tax structure. And I believe in that.
15 People who make the most money in income
16 should pay more than those who are lesser.
17 That's progressive. When you get too
18 progressive, overly progressive, you get
19 regressive.
20 And to suggest last year those people
21 we got to tax more progressive so we get --
22 but this year when you suggest the federal
23 government is going to increase on the rich
24 and the wealthy -- because that's what the
115
1 Governor said, they're going to leave the
2 State of New York -- now you're talking the
3 trickle-down situation. You're going to tax
4 those rich and wealthy, they'll leave. They
5 won't invest, they won't do research on new
6 products, they won't stay in New York State.
7 And I'm thinking maybe this quarter
8 might be a pretty good quarter for revenues
9 and bonuses because of what happened at the
10 federal level.
11 So I'd kind of like your take on some
12 of those things.
13 DOB DIRECTOR MUJICA: I hope too that
14 it's a good quarter for revenues and bonuses,
15 because it would help with, you know, the
16 budget gap that we have.
17 The state tax code is very
18 progressive. We have -- personal income
19 taxes have gone down, as a matter of fact,
20 for -- personal income taxes -- for all
21 New Yorkers. And corporate taxes have gone
22 down. The rates have gone down for
23 corporations, the rates have gone down on
24 personal income taxes for all.
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1 When you ask for -- is it meaningful
2 and a profound impact on the 1.7, I turn it
3 the other way also, when we talk about was
4 there benefit for the remaining people, for
5 the other million. Right? Is there a
6 meaningful and profound tax cut for them, or
7 did we take away tax deductibility and give
8 them a $1.50 a week benefit, as was recently
9 claimed? Is that meaningful and profound?
10 So is the tax cut that the federal
11 government gave to that group meaningful and
12 profound? We think not. The greater -- what
13 they did, we know, is -- 14.3 billion is
14 meaningful and profound overall for New
15 Yorkers. And when we talk about the
16 progressivity of -- you know, are we
17 concerned about the impact on the people who
18 pay the high rate in New York State? We've
19 always been talking about a marginal
20 difference. We're talking about a tenth of a
21 point, a marginal change.
22 What the federal government does was
23 increase the rate by like 25 percent. That
24 is something we're concerned about. It's one
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1 thing to work on the margins and to say this
2 has been the tax that has been in place. The
3 high rate is actually lower than it was when
4 the Governor took office. So we know what
5 that is. But what we have not seen is having
6 people's property taxes go up by 10 percent,
7 having their home values go down by 10
8 percent and having the -- for the high
9 earners, having their rates go up by 25
10 percent. None of which accrues to the
11 benefit of New York State. All of which
12 accrues to the betterment of the federal
13 government. It's a cash grab from the
14 federal government to them, to fund their tax
15 cut -- some of which is tiny -- and it hurts
16 the state.
17 So we've reduced taxes, and I think
18 the Governor will say he worked very well
19 with the Legislature to cap property taxes.
20 Can we do more? Yes. And we have been.
21 And as far as mandate relief, we've
22 done that too. I know people want to do
23 more. But we've capped Medicaid.
24 Medicaid -- when the Governor took office,
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1 Medicaid was -- 25 percent of Medicaid was
2 funded by local governments. Now it's
3 12 percent, 12 percent. And it's going to go
4 down every year because it's capped. The
5 state's picking up the entire amount of
6 Medicaid.
7 That's a huge achievement. I mean,
8 some of the counties don't want to
9 acknowledge that. I get it, because they
10 want more --
11 SENATOR TEDISCO: But that's a
12 differential of most of the states in the
13 United States of America. That's why we're
14 so different.
15 DOB DIRECTOR MUJICA: Yeah. We also
16 get the lowest FMAP rates in the entire
17 nation. Not only do we give the federal
18 government $48 billion, we get reimbursed at
19 the lowest rate out of any other state for
20 Medicaid, at 50 percent. That's the lowest
21 rate. Some states get 75 percent, some
22 states get a lot more.
23 So we get less than the federal
24 government. We've agreed to do that because
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1 we're a high-income state. But it's not fair
2 to take even more, and take even more under
3 the guise that it's a tax cut for the middle
4 class. It is not. It's a $1.5 trillion tax
5 cut that was paid for with deficit spending
6 and impacts New Yorkers negatively. It
7 impacts the state by $14 billion.
8 So that's the reality of it. We can
9 help to fix that and mitigate it, but we
10 can't deny that it happened and we can't do
11 nothing.
12 SENATOR TEDISCO: Thank you.
13 CHAIRWOMAN YOUNG: Thank you.
14 Just a couple more questions. Just
15 back to the opioid tax that's proposed. How
16 much revenue is that projected to raise?
17 DEPUTY COMMISSIONER HILLER: It's
18 projected to raise $127 million in Year 1 and
19 $171 million in Years 2 and outyears.
20 CHAIRWOMAN YOUNG: So all of that, 100
21 percent, would be used for opioid prevention,
22 recovery, treatment, all those services?
23 DEPUTY COMMISSIONER HILLER: The
24 proposal dedicates that surcharge to an
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1 opioid prevention treatment fund and opioid
2 treatment.
3 CHAIRWOMAN YOUNG: A hundred percent?
4 It wouldn't be used for anything else?
5 DEPUTY COMMISSIONER HILLER: I'm
6 hopeful that some tiny, minuscule fraction of
7 that will allow us to recoup some of our
8 costs in administering it, but I don't
9 remember whether that's a piece of the bill.
10 But even at that, that would be some tiny,
11 tiny fraction of it, and my guess is it
12 probably didn't make it through the process.
13 CHAIRWOMAN YOUNG: Thank you.
14 And then just a final question. I
15 know Senator Krueger asked about the credits
16 that are affected by the deferment. And
17 there are several, it's not just the
18 brownfields and the low income housing tax
19 credits, the biofuel production credit,
20 disabled worker credit, farm workforce
21 credit, credit on SONYMA mortgages, green
22 buildings, jobs retention credit -- and
23 that's just a partial list.
24 I think, according to this sheet that
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1 I have, these are the credits that -- it's
2 hard to see, obviously, but these are the
3 credits that are affected (indicating).
4 These are the credits that are not affected
5 by the deferments, and that's a lot easier to
6 read, because it's much shorter (indicating).
7 It's the Excelsior Program, the film
8 post-production credit, commercial production
9 credit, Youth Works credit, Hire a Vet
10 credit.
11 Are there any other credits that are
12 not affected by the deferment? Or is that
13 basically it?
14 DEPUTY COMMISSIONER HILLER: I don't
15 have that list in front of me, but that
16 sounds about right.
17 CHAIRWOMAN YOUNG: Okay. And just
18 because you're proposing to affect all these
19 other credits by deferment, how did you
20 choose those five credits?
21 DEPUTY COMMISSIONER HILLER: Some of
22 them, like the Hire a Vet credit, I don't
23 believe we have any taxpayers that are
24 claiming more than $2 million on that credit.
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1 CHAIRWOMAN YOUNG: What about the film
2 production credit?
3 DOB DIRECTOR MUJICA: We left two
4 credits in place, the film production credit
5 -- the main credits that remained were the
6 film production credit and the Excelsior
7 credit.
8 And the Excelsior credit we're still
9 using, it's an active credit that is our main
10 economic development tool. So in the
11 interests of being able to still maintain
12 some ability to bring new businesses here and
13 do some economic development incentives,
14 amongst all of that list -- I think, you
15 know, it's a good thing to look at that whole
16 list, because they've been created over time
17 and they still remain -- but the Excelsior
18 credit is one we're actively using as an
19 economic development tool, that ESD uses, and
20 the film production tax credit is one that's
21 actively creating jobs right now, and it's a
22 significant amount.
23 So those two, in addition to the
24 vets -- and I think there was one other. But
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1 that's really the rationale behind that.
2 CHAIRWOMAN YOUNG: I see Youth Works
3 credit.
4 So, you know, and I fully agree with
5 you, especially on the Excelsior credit,
6 because we've used that to create jobs all
7 over the state. So I'm glad to see that
8 that's left alone.
9 And I just want to say thank you for
10 being here today. I know it's been quite a
11 lengthy process, but a lot of good
12 information was shared with us today, and we
13 really appreciate it.
14 CHAIRWOMAN WEINSTEIN: Likewise, I
15 want to thank you for being here, and I hope
16 once --
17 CHAIRWOMAN YOUNG: Oh, I'm sorry,
18 Senator Krueger has another round. I
19 apologize.
20 SENATOR KRUEGER: Sorry. Well, I also
21 appreciate your being here. I'll just keep
22 you a few more minutes.
23 So for years I've been proposing that
24 the way we could increase revenue -- not with
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1 a new tax, but with a fairer structure -- is
2 to go after what is being seen around the
3 world with people collecting sales tax but
4 not paying it to the states. And we are now
5 one of the few states that hasn't gone to
6 some kind of automated system of tracking at
7 the location the actual taxes collected, but
8 then not tracking to see that they get paid.
9 So we still do a robust audit process,
10 and we hear from people that it's very
11 actually time-consuming, both for the
12 businesses and for the state, to do all of
13 these audits. But more and more around the
14 world, they're actually using automation to
15 actually track. And there are researchers
16 who have projected that New York State could
17 easily collect another $2 billion a year, not
18 in new taxes, but in taxes that actually are
19 getting paid by consumers and never being
20 moved to the state.
21 So since we haven't gone the
22 automation route, are we collecting that
23 money and I'm just not aware of it? Or, I
24 mean, why are we not doing what other states
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1 modernizing are doing?
2 EX. DEP. COMMISSIONER MANION: I think
3 that we are using automation to collect a lot
4 of tax, because we get third-party
5 information. We get third-party information
6 from the banks as far as like credit card
7 information for the sales of the different
8 businesses.
9 And as you know, not everything is
10 taxable at the point of sale. So we use our
11 business analytics to use the information we
12 get from the credit card companies, we get
13 information from the third-party sources --
14 beer, wine and liquor, they report to us on a
15 regular basis. We have information from the
16 cigarette distributors.
17 So we have a profile of all the
18 different businesses, and like businesses, so
19 that we can use that to identify those that
20 fall out of the norm to apply our audit
21 techniques to.
22 As far as tracking everything at the
23 site, I know I've seen some of this in place.
24 I've also seen where they just don't enter
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1 it. You know, it's as easy as leaving the
2 cash register open and not putting the
3 information into it. So there's a lot of
4 ways of not paying the tax, not recording the
5 tax. I think our audit program and us having
6 that third-party information is fairly
7 efficient. I'm sure it's not picking up
8 everything. But I think we get better at it.
9 We use a lot to identify where there is a
10 compliance issue. And we use third-party
11 information to calculate what the tax would
12 be.
13 So when we go into a business, a
14 business that normally gets selected, they
15 probably don't have a great point of sale,
16 they probably don't have a lot of good
17 internal controls. And so we do end up doing
18 what we call an indirect audit. And by doing
19 that, what we find from like their suppliers
20 -- you know, how many pizza boxes did you
21 buy, versus how many did you record as sales.
22 And so we use that type of information to get
23 at the accuracy of it.
24 I think that New York State vendors
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1 would probably be opposed to having
2 everything tracked and monitored by the
3 government. But if that's the way to go, I'm
4 sure we could write a system that could help
5 with compliance.
6 SENATOR KRUEGER: Well, the reason I
7 keep asking every year, or probably every
8 year, is that more and more parts of the
9 world and more and more states in this
10 country are going that route. And you
11 actually even hear from some vendors that
12 they would prefer that, that they actually
13 find that they get themselves in trouble
14 because they collect the sales tax but then
15 they have cash and they suddenly just start
16 to spend it instead of actually having it
17 available to pay in.
18 So there are even Third World
19 countries that do it at point of sale where
20 they don't even have wired systems, but
21 they're using, you know, smartphones to
22 actually report into their tax systems.
23 So are we seeing a significant growth?
24 Because the research shows it's at
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1 restaurants, bars, franchise stores, you
2 know, large and small. So are we seeing in
3 your model, that whatever you're using, that
4 we're seeing a growth in the rate of
5 collection?
6 EX. DEP. COMMISSIONER MANION: I think
7 we're seeing -- we're doing more audits.
8 We're doing them quicker. And we're
9 collecting more money on it.
10 We've also instituted a number of
11 other compliance type of initiatives where
12 we're identifying taxpayers, similar to what
13 you said, where they're doing the collection
14 but then they tend to pay their payroll with
15 the sales tax money. So what we're doing is
16 we're increasing the number of what we call
17 the segregated bank accounts. We ask them to
18 go into a segregated bank account. So we're
19 assisting them in their compliance. So every
20 day, you know, you've got your system and it
21 says that you collected $420 in sales tax,
22 put it into that account and use that account
23 for it.
24 We're increasing our education and our
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1 reminders out to taxpayers that are at risk
2 of falling off. So now with our online
3 service accounts, people are web-filing
4 through our system and they come in through
5 the online service accounts. And we send
6 reminders out to them. Like each quarter, we
7 have people that start filing their sales tax
8 return, they start putting the information
9 in, but then they don't hit send for the due
10 date. So we're doing outreach to them
11 through the email to say, you know, you
12 haven't submitted this, is this an error, is
13 this something you want to do? You know, is
14 this something that you should be doing?
15 So we're doing a lot of that. For the
16 taxpayers that are trying to comply and are
17 trying to get it right, we're doing a lot to
18 help them. And then we're doing a lot to be
19 looking for those that are not complying on
20 the other end.
21 SENATOR KRUEGER: I guess just
22 finally -- and more, I think, for
23 Mr. Mujica -- so at the Local Governments
24 hearing you had quite a few of the local
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1 governments talking about their concern that
2 as the utilities want to move to a 5G system
3 and systems where they no longer wire or
4 cable to provide any utilities to us --
5 phone, TV, Internet -- that they actually are
6 going to be losing the ability to tax and
7 collect money and control anything at the
8 local level.
9 I would urge you and the Governor to
10 take a look at the fact that, again, because
11 the world is changing and technology is
12 changing so fast, we are creating a system of
13 an uneven playing field, depending on whether
14 you're a business model that, you know, has a
15 cable that goes somewhere versus a business
16 model where everything is in the ether or in
17 the cloud.
18 There's an issue of ESCOs not having
19 the same tax system and paying the same taxes
20 as other utilities, which seems to me to be
21 totally unfair.
22 We still have the fact that DISH TV
23 doesn't pay the same taxes as the TV systems
24 that have cables and wires, although
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1 apparently they're all going to a model where
2 they won't have cables and wires.
3 So it would be the Tax Department
4 collecting the revenue, but it's really a
5 bigger-picture policy question on how does
6 the State of New York ensure, one, that we're
7 getting the revenue we need, but two, that we
8 have an even playing field for business
9 models that continue to evolve? And we want
10 them to evolve and be successful. I just
11 personally think that they ought to all pay
12 the same rate of taxes to the State of New
13 York.
14 DOB DIRECTOR MUJICA: Yeah. So
15 there's a certain commonality, really, in all
16 the things that you just talked about. And
17 the state tax code sometimes is slow to keep
18 up with technology. I think that's what the
19 Internet Fairness Tax is also about, which we
20 already discussed, right -- go to one site,
21 you pay the sales tax; go to another site,
22 you don't pay the sales tax. It's the exact
23 same product.
24 On the issue of -- on the ESCOs, we
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1 attempted to address some of that in the
2 budget by imposing the sales tax. I know
3 there's an issue of whether or not localities
4 can impose a gross receipts tax, which we're
5 looking at as well.
6 On the 5G issue, there's two policy
7 goals here, right? There's one the Governor
8 just announced, 99.9 percent of the state
9 having broadband capability and doing that.
10 On 5G, it's the same thing. What you're
11 seeing in a lot of communities is slower
12 internet service as a result of just capacity
13 issues. So you want the ability to build
14 out. At the same time, you want to have a
15 fair taxing structure in place.
16 And our law doesn't allow local
17 governments presently, independently, to do
18 all of those things. And in the interest of
19 maybe raising revenue, right, there's a
20 secondary interest on making sure that
21 there's as much access to 5G as possible.
22 So this is a new thing. This is
23 something we have to talk about. But the
24 proposal here is one about should we have a
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1 standardized way of imposing a tax or a fee
2 structure on 5G, as opposed to allowing local
3 governments to independently do different
4 things. Which may be in the interests of
5 local government, but not in the interests,
6 necessarily, of the consumer. So that's
7 something that we can talk about, you know,
8 during our budget discussions.
9 And on the issue of DISH and internet,
10 again, that just goes to all things that, you
11 know, are now changing. Right? They go onto
12 the internet, they go electronically. You
13 know, just can we maintain our overall tax
14 base while just taxing the same things, just
15 they're in a new form -- not raising
16 anything, but just making sure that we're not
17 losing some compliance that way.
18 So we're looking at all of those
19 things, and it's -- so we have to keep up,
20 our tax laws have to keep up with technology.
21 CHAIRWOMAN YOUNG: I just had a couple
22 more questions, just because Senator Krueger
23 raised some questions in my mind.
24 So the proposal in the Governor's
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1 budget would actually raise taxes on building
2 out providers for 5G internet, that sort of
3 thing. And as you know, in rural areas
4 across the state, such as the one I
5 represent, there's a real shortage of that
6 type of infrastructure, and it's put rural
7 areas at a real economic disadvantage. And
8 it actually impacts people's quality of life.
9 So if you raise taxes, and it's -- you
10 know, if you heavily tax building out and you
11 put that on the people who would build out,
12 what incentive would there be for them to do
13 so? I know there's language that says that
14 they can't pass it along to the consumer.
15 But what company in their right mind would
16 take on those heavy costs and be incentivized
17 to actually put in the infrastructure?
18 This is something that is akin to the
19 1930s when they electrified the state and
20 they put electricity in rural areas. And for
21 my mind, I think the fact that we need that
22 broadband, that kind of infrastructure is
23 crucial to our economic success. And we're
24 way behind a lot of other states in building
135
1 out that infrastructure.
2 So I just -- I guess I want to raise
3 there's a concern over this heavy tax that's
4 included, because I think that it actually
5 could backfire and cause fewer buildouts than
6 what we actually need.
7 DOB DIRECTOR MUJICA: And the intent
8 on the 5G issue is actually not to impose a
9 new tax, but to standardize how local
10 governments do it so it's not different to
11 taxing regimes all across the different
12 municipalities, but there's a commonality to
13 it. So that's --
14 CHAIRWOMAN YOUNG: But isn't there a
15 proposal to -- you know, if you use the
16 right-of-way, for example, on the Thruway,
17 wouldn't there be a heavy tax imposed to
18 companies for using that right-of-way?
19 DOB DIRECTOR MUJICA: So there is a
20 proposal separate from the 5G on the use of
21 the right-of-way. There are certain
22 businesses that are technology firms,
23 communications firms, that are currently
24 using the right-of-way and there is no fee
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1 for that right-of-way. Other states charge a
2 fee for the use of the right-of-way where
3 they're using that technology in order to,
4 you know, to raise --
5 CHAIRWOMAN YOUNG: How does the
6 proposal in the budget compare to those other
7 states as far as how heavy the tax is,
8 whether it's annual or not annual, whether
9 it's one time? Have you done an analysis of
10 that?
11 DOB DIRECTOR MUJICA: We have. We
12 believe it's similar. But we can get back to
13 you on that analysis.
14 CHAIRWOMAN YOUNG: That actually would
15 be great.
16 And I do have one final question, I
17 apologize. But this ties into the proposed
18 tax hikes. And as you know, in the Senate we
19 pass legislation every year to impose a
20 permanent 2 percent spending cap. And we've
21 worked successfully with the Governor ever
22 since he became governor to try to adhere to
23 that 2 percent spending cap.
24 I know the Governor has spoken
137
1 extensively about the $4.4 billion budget
2 shortfall that we're facing this year, and
3 obviously that's serious. But what happens
4 when you apply the 2 percent spending cap?
5 Because it's my understanding that that would
6 actually take the deficit down to about $1.7
7 billion. Is that the case?
8 DOB DIRECTOR MUJICA: That's right.
9 So if you apply the 2 percent spending cap,
10 it reduces the gap by about $2.7 billion,
11 leaving $1.7 billion.
12 Now, applying the cap doesn't mean you
13 have to do things, right, it just means that
14 we have to reduce spending by $2.7 billion,
15 which you see all of those actions in the
16 budget. But yeah, you're correct that the 2
17 percent brings --
18 CHAIRWOMAN YOUNG: Right. So it
19 limits growth in programs, some of the
20 heavier-cost programs such as Medicaid, for
21 example, right? So instead -- it still would
22 grow, but it limits it to 2 percent. Is my
23 understanding of that --
24 DOB DIRECTOR MUJICA: That's right.
138
1 The biggest factor, the biggest-growth
2 areas, right, are -- because it's 45 percent
3 of the budget -- is school aid and Medicaid.
4 Because they're both growing at much greater
5 than 2 percent.
6 So in order to stay at the 2 percent,
7 the rest of the budget is mostly at zero, and
8 then you have Medicaid growing by about 3.2
9 and education growing at 3.
10 So yes, so the 2 percent is in the in
11 middle of that. It allows us to increase
12 Medicaid and education by more than the 2.
13 And then everything else has to be at zero
14 because you're -- because it's --
15 CHAIRWOMAN YOUNG: So really, in the
16 context of a $168 billion proposed budget, a
17 $1.7 billion shortfall is much more,
18 manageable than $4.4 billion, right? So --
19 DOB DIRECTOR MUJICA: Yeah. And prior
20 -- this is the -- in prior years, by applying
21 the 2 percent spending discipline, we were
22 able to almost eliminate the gap. Right? So
23 in prior years after you did the 2 percent,
24 you're at a couple hundred million dollars.
139
1 This year, for the first time, even after
2 doing the 2 percent, you're at $1.7 billion,
3 and that's the greatest number since 2011.
4 So it's a significant number. And then you
5 have the federal risks on top.
6 But yes, it's -- 2 percent doesn't
7 mean, though, you don't have to do cuts; it
8 means you've still got to find, you know,
9 $2.7 billion in savings. But that's the
10 benchmark, and then you try to solve after
11 that.
12 CHAIRWOMAN YOUNG: Thank you. And I
13 just think that, for example, on the
14 deferments, on the programs that actually
15 stimulate the economy, if the number is much
16 more manageable, then we should probably take
17 a look at that and continue to not have the
18 deferment, for example, on some of the
19 programs, those types of programs, because we
20 need to grow the economy in New York.
21 But thank you again for all the
22 information that you shared today.
23 CHAIRWOMAN WEINSTEIN: I again want to
24 thank you for being here. And I assume once
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1 we see the 30-day amendments, there will be
2 more discussions on -- there may be some more
3 questions and discussions. We look forward
4 to having those with you.
5 Thank you again for being here.
6 DOB DIRECTOR MUJICA: Thank you,
7 Chairwoman Young. Thank you, Chairwoman
8 Weinstein.
9 EX. DEP. COMMISSIONER MANION: Thank
10 you.
11 CHAIRWOMAN YOUNG: Thank you.
12 CHAIRWOMAN WEINSTEIN: Thank you.
13 Next we have the Business Council of
14 New York State, Ken Pokalsky, vice chairman
15 {sic}.
16 MR. POKALSKY: Good morning,
17 Chairwoman Young, Chairwoman Weinstein. And
18 I appreciate the promotion.
19 I'm Ken Pokalsky. I'm vice president
20 of government affairs for the Business
21 Council of New York State. And on behalf of
22 our membership, I really welcome the
23 opportunity to be here this year, as in
24 previous years.
141
1 And importantly, as I think you've
2 heard, we're talking about some new and
3 unique tax policy challenges and issues than
4 in prior years.
5 In my written testimony today, I focus
6 on three broad topics. I'm really going to
7 spend my time at the microphone on the first
8 two. We talk about general conformity
9 issues, bringing New York State's income and
10 corporate tax into conformance with the
11 amended federal tax code. We're going to
12 spend some time talking specifically about
13 the mitigation measures that you just heard
14 about, such as the payroll tax concepts.
15 And as always, we focus on the revenue
16 measures and tax policy changes included in
17 the Executive Budget. I'll touch on those if
18 I can, but I think the first two are new and
19 different and I'd like to spend most of my
20 time there.
21 In his State of the State message, the
22 Governor argued that increasing the cost of
23 state and local taxes makes New York less
24 competitive and helps other states at our
142
1 expense. We couldn't agree more. And we
2 would emphasize that this is true whether the
3 tax increases come from federal or state
4 legislative actions.
5 And it's important to recognize that
6 despite some recent improvements, and you've
7 heard about them today -- the cap on property
8 taxes, 2 percent spending control, 2014
9 corporate franchise tax reform, and others --
10 New York remains a high-tax state. It's a
11 high-tax state in general, it's a high-tax
12 state for business. And you can quibble with
13 the methodologies, but every major analysis
14 that we're familiar with -- whether it's by
15 the Tax Foundation, Forbes does an annual
16 study of state and local tax burdens, some
17 done by private firms, by Andersen Economic
18 Group and others -- we're ranked within the
19 top one or two, maybe top four or five, in
20 terms of overall tax burden.
21 I say that because, one, we have
22 specific tax measures in the budget aimed at
23 the private sector, but also there's this
24 growing narrative that says because there's a
143
1 federal reduction in business tax rates, New
2 York State should raise its taxes on those
3 businesses.
4 Now, that may make some sense if you
5 are in a fairly low-tax jurisdiction. But as
6 I've just said, New York State's overall tax
7 burden on employers is high, we think it's
8 the wrong way to go.
9 Importantly, if you look at the
10 details of the Executive Budget economic and
11 revenue projections, they're projecting a
12 billion-dollar increase in fiscal 2019 in
13 corporate franchise tax payments to the
14 state, driven primarily by growth in
15 corporate profits. While that forecast may
16 be somewhat optimistic -- and they're
17 forecasting a 32 percent increase in fiscal
18 '19, 15 in the following year -- to us it
19 illustrates the importance of promoting
20 economic growth, rather than new tax
21 mechanisms, to the state's long-term
22 financial future.
23 A couple of comments on federal
24 conformancy. The Business Council was a
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1 strong supporter of federal business tax
2 reform, and we're on the record and
3 communicated our support to Congress. At the
4 same time, we did oppose the caps on SALT
5 deductibility. We didn't think the statute
6 had to be written that way. And we certainly
7 raised concerns there.
8 But in terms of the overall changes,
9 we have to remember what the purpose was, the
10 original purpose of the reform effort, and
11 that was to bring the federal taxing
12 mechanisms into line with what other major
13 industrial nations do. And that reform did
14 two basic things. It moved us to what's
15 known as a territorial or waters-edge tax
16 scheme where, going forward, most but not
17 all, most foreign-earned income will be not
18 taxed by the U.S.
19 It also brought our tax rates into
20 line with what the other OEDC states were
21 imposing. And U.S. corporate tax rates are
22 high on both a statutory and effective tax
23 basis.
24 It did a lot of other things. And as
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1 you heard earlier about issues in decoupling
2 or staying coupled with federal tax reforms
3 in the personal income tax arena, we think
4 there's also some important reforms that have
5 to be done in the state's corporate franchise
6 tax to again avoid unintended consequences
7 and tax increases due to a new misalignment
8 between federal and state tax laws.
9 I'll just give you two examples.
10 Under the federal tax reform, certain
11 economic development incentives provided by
12 state and local governments will be
13 considered contributions to capital and
14 therefore recognized in a business's gross
15 income, adding to their federal tax
16 liability. These are, you know, capital
17 grants, as we do with the Regional Economic
18 Development Council process. It would make
19 no sense for New York State to remain coupled
20 to that federal change, as it would erode the
21 value of economic development incentives
22 being handed out by one hand of the state,
23 but then taxed by the other.
24 Another example is federal tax reform
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1 provides for bonus depreciation, the ability
2 to write off a hundred percent of the cost of
3 capital expenses in the year they were
4 incurred. But as a tradeoff, the federal
5 reform puts a cap on deductibility of
6 interest expenses, arguing that those
7 interest expenses are usually incurred as the
8 price of investing in capital.
9 New York State has already decoupled
10 from the provisions of federal law that offer
11 federal bonus depreciation, and so far we've
12 seen no proposal from the administration to
13 recouple. But if that stays and we do not
14 get the benefits of bonus depreciation, we
15 should also decouple from the federal caps on
16 interest deductions as well.
17 In the next several days, we'll be
18 presenting the administration and the
19 Legislature with our complete set of
20 recommendations on business tax conformity
21 issues. But our basic position is this, that
22 for both the corporate franchise tax and the
23 personal income tax, New York State should
24 adopt conformity language that avoids
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1 increases in state tax liabilities due to
2 New York's tax law falling out of alignment
3 with the new federal language.
4 Now I want to spend the rest of my
5 time talking about tax mitigation and payroll
6 tax alternatives.
7 We appreciate the administration's
8 effort to examine ways to mitigate the
9 adverse impacts of federal tax reforms,
10 principally the cap on SALT deductibility.
11 Of course, one alternative is to actually
12 reduce the state and local taxes subject to
13 the SALT deduction cap. Expiration of the
14 so-called millionaire's tax rate and tax
15 bracket in 2020 will significantly mitigate
16 the impact of the SALT deduction cap on
17 high-income earners. And by the way, the
18 higher the earnings, the more complete the
19 mitigation is.
20 But we've reviewed the department's
21 January 2018 preliminary report on mitigation
22 measures. We've received considerable input
23 from our membership, businesses of all types
24 and sizes, from practitioners in the legal
148
1 and accounting world. And while we look
2 forward to reviewing any specific payroll tax
3 options included in the 30-day amendments,
4 I'd like to share with you what our response
5 and concerns are to date.
6 Any payroll tax mechanism would likely
7 result in immediate cost shifts to the
8 employer. As the department's report
9 recognizes, a payroll tax for income tax swap
10 can only maintain pre-federal-reform levels
11 of after-tax income for both employers and
12 employees if it's accompanied by a wage
13 reduction roughly equivalent to the new
14 payroll tax being paid by the employers. And
15 as you've talked about already, there's a lot
16 of issues and concerns about reducing wages
17 to balance out that equation. As a math
18 equation, in a spreadsheet, I can show you
19 how it works. In the real world, there's a
20 lot of concerns.
21 Issue Two. As is illustrated in the
22 Executive Budget's fiscal plan, the state
23 will be facing significant budget gaps in
24 each of the next three years, and likely
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1 beyond that. And a new payroll tax on
2 employers will be a tempting target for
3 future administrations and legislatures
4 looking for increased taxes revenues but
5 reluctant to impose such taxes directly on
6 employees or consumers.
7 Third, any payroll tax mechanism can
8 only -- you've heard this $14 billion cost
9 impact to New York taxpayers. Any payroll
10 tax mechanism can only offset a fraction of
11 that, for a couple of reasons. Most of that
12 incurs amongst upper-income taxpayers who a
13 significant portion of their income is
14 nonwage income, so a payroll tax for PIT swap
15 has no effect.
16 Likewise, somewhere between 15 and
17 20 percent of all wage income in New York
18 State is for employees who work for either
19 not-for-profits or government. There's no
20 payroll tax/deductibility swap to be had for
21 those taxpayers.
22 Adopting a new payroll tax mechanism,
23 especially one that tries to replicate the
24 progressivity of the personal income tax,
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1 will impose significant new administrative
2 and compliance burdens on the state and
3 employers alike.
4 And even for an opt-in alternative
5 where you said an employer could choose to be
6 taxed under this regimen or not, we see a lot
7 of concerns. As an example, in the
8 department's option paper, it suggested
9 employers that opt into such programs could
10 be subject to provisions, and I quote,
11 advancing other state policy objectives
12 relating, for example, to labor policies or
13 workforce investments.
14 At most, we really urge a more
15 thorough review of options, maybe with an
16 expert workgroup comprised of tax policy and
17 tax administration experts, looking at both
18 the alternatives and the practical challenges
19 of implementing those.
20 As I said, we focus on a lot of issues
21 in the budget in both our testimony -- and
22 other bill memos that we'll be giving to the
23 Legislature address others. If I could make
24 just two very brief comments on some of the
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1 specific tax provisions in the
2 Executive Budget.
3 One is on the deferrals. One thing
4 that needs to be considered, by the Division
5 of Budget's own projections, New York State
6 is going to have a much more challenging
7 financial situation in 2021 than it will this
8 year --
9 CHAIRWOMAN WEINSTEIN: Can you -- it
10 would just help if you could just conclude,
11 because we've actually given more time than
12 we have in other dates.
13 MR. POKALSKY: Sure. Sure. So our
14 concern is that when those tax credits become
15 due, New York State is going to have even
16 less ability to make good on the commitments
17 already made to taxpayers who have made
18 investments or hired new workers in New York
19 State.
20 So I'll stop there, and I welcome any
21 questions or comments you have.
22 CHAIRWOMAN YOUNG: Thank you. I do
23 have some questions.
24 You touched on it, but what challenges
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1 would a switch from personal income tax to a
2 payroll tax pose for employers?
3 MR. POKALSKY: Sure. Well, first and
4 foremost, if the purpose is to leave both the
5 employer and the employee with the same
6 after-tax income as they would have had
7 pre-federal reform, a major part of the
8 equation is there's going to be a wage
9 adjustment. And the department's white
10 paper, option paper, suggests that.
11 That's going to be a challenge to do
12 in all circumstances. And if you have an
13 organized workforce, it will certainly have,
14 you know, more challenges. If you have
15 employees at or near the minimum wage, it
16 would -- you probably wouldn't need to do
17 this for them to keep them whole taxwise.
18 CHAIRWOMAN YOUNG: But this was
19 pointed out -- but also was pointed out. But
20 that could push them into Medicaid programs,
21 which would increase the tax burden, right?
22 MR. POKALSKY: Sure. That's issue
23 number one.
24 Issue number two are all the other
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1 things that are based off wages, including
2 pension calculations, 401(k) matches, state
3 benefits, et cetera.
4 It's a big change. It's the
5 administration of it. If you tried to --
6 right now an individual, those with -- you
7 know, declares their or proposes their
8 withholdings, based on what they expect their
9 tax liability to be for the year. At the end
10 of the year, you file a return, you may get a
11 refund, you may pay more. If the purpose was
12 to create a payroll tax that replicates what
13 an employee would pay on their income tax, at
14 the end of the year there's going to be a
15 misalignment. And I don't know how you would
16 reconcile at the end of the year.
17 To not do that, you would -- you know,
18 the option paper talks about just doing a
19 flat tax on all payroll. If that's
20 substituting for, you know, progressive
21 income tax, you've lost an important design
22 of the state's income tax structure.
23 So a lot of technical challenges of
24 doing it.
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1 CHAIRWOMAN YOUNG: Thank you for that.
2 We had a discussion, Vice President
3 Pokalsky, with previous witnesses about
4 deferring the tax credits. So what impact,
5 in your estimation, would the deferment of
6 tax credits have on businesses? And
7 especially, what happened in 2010, the last
8 time that this happened?
9 MR. POKALSKY: Well, we know that --
10 we've done a number of things on tax credits
11 already awarded. In 2010, they were deferred
12 for three years. We imposed new criteria on
13 businesses that made investments under the
14 old Empire Zone program, but lost the
15 benefits based on the change. In our view,
16 all of these types of measures makes it that
17 much more challenging for New York State to
18 sell itself and its incentive programs to
19 businesses looking to do business in New York
20 State.
21 We're now -- we're working up a list,
22 looking at the brownfield programs in
23 particular, because the data is out there and
24 readily accessible, to look at projects that
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1 will likely be over $2 million in the
2 redevelopment component.
3 So these are projects where financing
4 is being put together specifically for that
5 project. They're usually done through LLCs.
6 And the credit is an important component of
7 the cost benefit of making an investment on a
8 site where you're going to have to incur
9 unusual costs to do cleanup in the first
10 place.
11 Our concern is that is going to be a
12 major -- if the purpose of the brownfield
13 program is to cleanup and redevelop already
14 used properties, mostly in urbanized areas,
15 this is going to make it that much more
16 unlikely that investors are willing to do so.
17 You're designing your financing package for
18 today, and to say, well, a major component of
19 it will only be available to you in 2021 --
20 and by the way, you don't get it in 2021, it
21 gets paid back to you on refundable credits
22 over a three-year period, nonrefundables over
23 -- it could be up to a 10-year period.
24 That really changes the equation on
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1 how you put a package together. So we do
2 think it will discourage certain types of
3 investments.
4 And lastly, one of the largest
5 dollar-wise -- two of the largest dollar-wise
6 credits are of particular interest to
7 manufacturing, the investment tax credit and
8 the tax credit for real property taxes paid
9 by manufacturers. One, you know, is a direct
10 support for ongoing capital investments, and
11 the other is trying to offset the high cost
12 of property taxes on capital-intensive
13 businesses.
14 We think the effect on those
15 businesses would be immediate, would have an
16 immediate impact on their cost of doing
17 business in New York State.
18 CHAIRWOMAN YOUNG: Did you do an
19 analysis after 2010? Did the Business
20 Council ever really look at what the economic
21 impact was? Because that was a downturn time
22 in the economy, and we knew that -- at least
23 from the companies that I was aware of, who
24 were impacted by this change in the law, that
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1 they were very upset at New York, New York
2 had made a promise to them, New York didn't
3 keep the promise.
4 Did you do an analysis, any kind of
5 economic analysis on what happened after
6 2010?
7 MR. POKALSKY: Not specific on
8 reaction to tax credit deferrals.
9 One thing we do know from 2010,
10 roughly when the recovery from the '08
11 recession really started to take hold, is
12 that most of upstate has done -- has had very
13 little growth, and most parts of upstate are
14 maybe just about at or not quite at their
15 employment levels pre-'08 or 2008 -- you
16 know, pre-recession.
17 So we know that much of the geographic
18 area of the state is still struggling to recover
19 from the recession. To the extent to which we
20 have incentives that, you know, are not honored,
21 we see that as, you know, taking away from our
22 efforts.
23 CHAIRWOMAN YOUNG: Right. And you
24 recall -- probably painfully, as do I --
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1 during those years in '09 and '10, there were
2 123 new taxes imposed, $14 billion in tax
3 hikes. And that had a very serious economic
4 drag on the economy across the state. And as
5 you pointed out, upstate still suffers from
6 trying to recover from those bad policies.
7 So I appreciate that input. Thank
8 you.
9 CHAIRWOMAN WEINSTEIN: Thank you for
10 being here. I think that's it for questions
11 for you.
12 Next we have Empire Center for Public
13 Policy, Edmund McMahon, research director.
14 MR. McMAHON: Well, good afternoon,
15 Assemblymember Weinstein, Senator Young,
16 Assemblymember Oaks, Senator Krueger, and
17 other members. Thank you very much for this
18 opportunity to testify here today.
19 I'll obviously just summarize what's
20 in my testimony, if I may.
21 To begin with, I think the budget
22 process, especially on the revenue side, has
23 been overshadowed by the issues arising from
24 passage of the Tax Cuts and Jobs Act, which
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1 as you know is the most significant federal
2 tax overhaul in 31 years. Unfortunately, I
3 think so far the Executive Budget barely
4 addresses most of the issues arising from
5 those federal tax changes, and I think in
6 some respects it adds to the state's
7 competitive challenges, in some cases with
8 further tax increases.
9 For example, I refer to the
10 $140 million that's supposed to be raised
11 from what the budget describes as a windfall
12 profit fee on for-profit health insurers,
13 which I point out will add to the
14 $5.7 billion of taxes and fees we already
15 impose on healthcare.
16 Now, as my Empire Center colleague
17 Bill Hammond has written, the proposal raises
18 fairness issues, since it appears to target
19 only fully insured health plans, which are
20 sold mainly to individuals and small
21 businesses, which are the segments most
22 likely to drop coverage over affordability
23 issues. I'm sure Bill will get into this in
24 more detail when he testifies at the joint
160
1 hearing on health issues.
2 But suffice it to say this isn't just,
3 in our opinion, wrong-headed health policy,
4 it's also inequitable and counterproductive
5 tax policy. And I'm referring to the general
6 principle or the notion that you can have a
7 precedent or that the state should claw back
8 the federal tax savings from any business
9 arbitrarily deemed to have collected a
10 so-called windfall from Washington. This
11 undermines a key purpose of the federal
12 corporate tax reform, which is to encourage
13 businesses to increase pay, hire more
14 workers, and expand capital investments.
15 Now, reasonable people can disagree on
16 the extent to which they think that will
17 actually happen as a result of the tax bill.
18 But the more you do these windfall grabs, the
19 less you will get, for sure.
20 I won't dwell too much on other
21 issues, although I do want to digress into
22 one other issue, which is all the discussion
23 about the tax credits that have been
24 suspended. If you take those tax credits at
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1 face value, which is a whole other subject,
2 really what the policy that the Governor is
3 proposing says is that low-income housing,
4 brownfield redevelopment, historic
5 preservation and some other things are a
6 whole lot less important than motion picture,
7 TV and commercial production.
8 I can point you to studies pointing
9 out that it's actually questionable whether
10 that generates jobs or subsidizes jobs, that
11 latter credit -- which is far bigger than any
12 of the other credits. And so I think that at
13 the very least it's inconsistent at carving
14 out a special status, for reasons that to me
15 remain unclear.
16 But putting that aside, rather than
17 focus on the tax changes in the budget, I'd
18 like to use my time available to focus on the
19 state's response to the federal tax law and
20 on the real implications of the law.
21 I think it's important to really face
22 up to the actual impact of the law, as
23 opposed to the broad statements that have
24 been made in recent months during the
162
1 political dispute over whether it would be
2 enacted, and that is most New Yorkers will be
3 paying lower federal taxes under the new
4 federal tax law.
5 I'm not endorsing the law as a whole,
6 or the process that produced it, much less
7 the cap on SALT, but that's a fact. And that
8 includes people who are among the itemizers
9 who had more than $10,000 in state and local
10 property taxes to deduct. A lot of those
11 people -- in fact, probably most of them --
12 will also see their federal taxes cut.
13 And if you overstate the problem and
14 are far too broad in the way you think this
15 affects New Yorkers, you're going to be
16 mistaken in your response to it. So I think
17 it's really important to recognize what's
18 actually happening here.
19 The largest identifiable group of
20 New Yorkers who as a group have a problem --
21 at least the majority of the members in that
22 group -- or who are losing most from the cap
23 on state and local tax deductions, are your
24 highest earners, the top 1 percent, people
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1 who live in New York who earn over a million
2 dollars a year, who generate over 40 percent
3 of the personal income tax, which is the
4 state's largest tax.
5 They claimed average state and local
6 tax deductions of $500,000 in 2015. Which
7 means, doing the math, that they've lost
8 98 percent of the tax deduction. They
9 basically are now -- people who live in
10 New York City who don't -- depending on their
11 tax status, but I think the majority, for the
12 most part, are facing a higher effective
13 marginal rate, all in, federal, state and
14 local, than they paid before the tax change.
15 In isolation, the state and local rate, which
16 you can think of as the net tax price of
17 being in New York, is going to be higher than
18 it's ever been in history, considerably
19 higher.
20 So this is uncharted territory, and
21 this obviously increases the stakes for
22 New York of maintaining its current tax
23 policy without careful consideration of what
24 the federal law has done. We can discuss
164
1 that more if you'd like to. I would say the
2 recent statistics, building on what I cited
3 to you last year, is that there's been a
4 significant growth in the category of
5 nonresident payers who make multi-million-
6 dollar incomes; that is, people who don't
7 live in New York who have some business tie
8 here, so that they're in our tax base, but
9 who do not pay taxes on the bulk of their
10 income to New York because they have moved
11 elsewhere.
12 There's a demographic factor here that
13 we can't control with just our tax policy. A
14 lot of people who are wealthy happen to be
15 older, and they're baby boomers. And they're
16 thinking of or planning to retire or are
17 retiring, and naturally a lot of them are
18 going to leave no matter what.
19 What you've done -- what the current
20 tax policy does and what the federal tax
21 policy does is for anybody who's on the curb,
22 it pushes them into the street and on their
23 way out faster, because there's that much
24 bigger a tax bite on their income.
165
1 Especially, remember, if you're
2 dependent on capital gains income, which is
3 one-third of the income of people making over
4 a million dollars who live in New York, and
5 more among nonresidents, one-third of your
6 total tax, if you live in New York City, is
7 state and local tax. You can cut your tax by
8 one-third if you simply leave.
9 And if that's your retirement income,
10 high as it is by most of our standards,
11 that's something you have to consider. So we
12 need to be aware of that.
13 Now, we know that there's a big tax
14 cut here for C-corps, although many of them
15 had lower effective rates before certain
16 loopholes were closed. There's also cuts for
17 pass-through entities. But if you've
18 talked -- you already talked to witnesses
19 here, a lot of people in the tax field will
20 tell you that this is very confusing. The
21 federal tax law has got a lot of ambiguities.
22 There's a lot of questions to be answered.
23 It's a work in progress.
24 And I would make, parenthetically, a
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1 note -- I won't go into it -- there's a
2 technical issue regarding the deductibility
3 of UBT payments to New York City that I think
4 you need to clarify also. That's pretty
5 important. And that's -- I won't get into
6 that here, I can give you some paperwork on
7 that later just for your own information.
8 Assuming that the UBT is still deductible --
9 that may not be the case -- maybe it will
10 work into the post-budget discussions, I
11 don't know.
12 In the meantime, your top priority
13 should be to decouple from federal law where
14 necessary to prevent automatic tax hikes. As
15 noted, the Senate has passed a bill on this.
16 The budget director just stated that that's
17 going to be addressed in the 30-day
18 amendments. Okay, that's a good thing.
19 It's still puzzling to me that this
20 was not included in the budget to begin with,
21 because the budget did decouple from a single
22 portion of the new federal tax law. One and
23 only one provision of the new federal tax law
24 is specifically decoupled from New York law
167
1 in the budget, and that's Part P of the
2 revenue bill, and that is the child credit.
3 The federal child credit is being doubled and
4 eligibility for the child credit is being
5 expanded to higher income ranges.
6 With no further change, that would
7 result in a significant increase in the
8 Empire State Child Credit, benefiting many
9 hundreds of thousands of families who now
10 claim it. The Governor's budget goes out of
11 its way to make sure that doesn't happen, by
12 decoupling.
13 I would point out to you, you may want
14 to reconsider why you should reject out of
15 hand one of the federal tax changes that
16 would clearly reduce state taxes for all
17 New Yorkers who are in this category. You
18 could, for instance, keep linked to the
19 federal law. You could allow the Empire
20 State Child Credit to be doubled, from $333
21 maximum to $666, and be available at higher
22 income ranges, and you could more than pay
23 for it.
24 How? You could repeal the sales tax
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1 exemption on clothing purchases under $110,
2 which was initially boosted mainly by the
3 State Assembly as a way to help working
4 families. A good motive, but which is not
5 well-targeted and which presently also serves
6 simply to reduce sales taxes on t-shirts for
7 tourists and other items. A working family,
8 especially a lower-income family, would get a
9 lot more out of a $333 per child boost in the
10 child credit than from the continuation of
11 the sales tax exemption on clothing, under
12 smaller clothing purchases.
13 We've also decoupled already from
14 federal law on estate tax. That was already
15 written into the law. But the feds have
16 reduced their estate tax by raising the
17 exemption, which further isolates us in a
18 competitive sense, because we're now only one
19 of a dozen states with an estate tax.
20 And we have a rate cliff in our law
21 that's complicated -- I could explain to you,
22 but it basically makes our tax rate on the
23 smallest estates still subject to the law,
24 subject to a higher state rate than a federal
169
1 rate.
2 Now, finally, and most importantly,
3 the Governor said he's looking for ways to
4 thwart the SALT cap, and Budget director
5 Mujica discussed this at length in his
6 testimony. I would suggest to you that the
7 Tax Department report -- the real bottom
8 line, if you read that report, is that going
9 to a payroll tax would be unworkable and
10 undesirable, for a whole raft of reasons.
11 And as I mentioned earlier, the premise
12 behind that is that you need to do a broad
13 switch to a payroll tax because otherwise the
14 federal tax law will have a devastating and
15 massive increase on New York. The problem
16 is, that's not true, and thus you shouldn't
17 do it.
18 He's also indicated they'll explore
19 the charitable foundation possibility as a
20 way to preserve tax-exempt contributions in
21 lieu of taxes. You're supposed to get some
22 proposals in the 30-day period.
23 I would make three suggestions.
24 First, don't rush. Don't be rushed into
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1 jamming this into the budget process. It's
2 going to be extremely complicated with lots
3 of unintended and unforeseen consequences.
4 There's no need to do this as part of the
5 budget.
6 Second, don't add to the state's tax
7 burden on any individual or employer.
8 Third, don't create new platforms or
9 vehicles for higher taxes in the future.
10 I'll end with some good news. I think
11 the Legislature can pat itself on the back
12 for this. Two steps you've taken in the last
13 seven years could have been done in
14 anticipation of the loss of the SALT
15 deduction. And I'm referring to the property
16 tax cap outside New York City, which is
17 saving property owners billions of dollars a
18 year that they otherwise would have added to
19 the cost, the net cost, of the loss of the
20 SALT cap.
21 Secondly is that multiyear personal
22 income tax cut, which is beginning to phase
23 in this year. In fact, because of the way
24 it's designed, it will deliver the biggest
171
1 savings to the people who are most likely to
2 receive a minimal federal tax cut and perhaps
3 a small federal tax increase because of the
4 SALT loss. And I'm referring to the
5 six-figure middle class of the New York
6 suburbs -- and in New York City, but
7 particularly those with high property taxes.
8 They're going to get the biggest tax cuts
9 under that program.
10 So it's important to make the property
11 tax cap permanent and to follow through and
12 push through on those tax cuts. And those
13 are the two single -- those are the two most
14 important things, the two highest priorities
15 for coping with the impact of federal tax
16 reform.
17 Thank you.
18 CHAIRWOMAN WEINSTEIN: Thank you.
19 Senator Young.
20 CHAIRWOMAN YOUNG: Yes. First of all,
21 E.J., thank you for being here. You're
22 always a fountain of information and we truly
23 appreciate that.
24 I want to thank you for bringing up a
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1 couple of things. And, you know, usually the
2 Tax hearing can be somewhat of a yawner, but
3 this year there are so many tax policy
4 changes that are proposed that it is a little
5 bit more exciting.
6 But thank you for bringing up the
7 windfall tax, because I meant to bring that
8 up. And there are a lot of issues that you
9 pointed out -- it's arbitrary, it's just on
10 one segment of the economy, health insurers.
11 Wouldn't it make more sense to have some kind
12 of effort to have health insurance premiums
13 go down instead of collecting this windfall
14 tax? Because people every day are struggling
15 paying for their health insurance. And it's
16 been a real problem, as we know, and premiums
17 have escalated, under Obamacare.
18 Could you address that a little bit
19 more deeply?
20 MR. McMAHON: Well, I think -- and I
21 would defer a little bit, more than a little,
22 to Bill on this, who's followed it much more
23 closely; in fact, has written about it within
24 the last day or so, about the very issue
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1 you're raising.
2 But I would point out there is a --
3 the part of the health insurance marketplace
4 we're talking about is in fact competitive,
5 that the normal process would lead to -- when
6 companies have more breathing room like this,
7 is to make them more aggressive in holding
8 down rates.
9 We also have a regulatory process
10 which was cited here earlier, including a
11 process in which medical loss ratios are part
12 of the determination in setting premiums.
13 All of those things are influenced in
14 different ways by what the tax burden is.
15 And I think that if you simply let the
16 process and the marketplace take care of
17 itself, that the result of lower taxes on
18 for-profit health insurers in this segment,
19 this area of the market, is going to tend to
20 bring down premiums naturally.
21 Now, again, I would prefer to defer to
22 Bill on more of that, because he's really
23 done a lot of thinking about and research in
24 the area. But that would be my inclination
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1 or suggestion to you.
2 CHAIRWOMAN YOUNG: And another issue I
3 wanted to bring up was the historic
4 preservation tax credit. You have a good
5 sense as to how that's had a positive impact
6 on the economy in New York.
7 MR. McMAHON: Well, I would think,
8 without endorsing all these tax credits --
9 because there is a school of thought,
10 including in fact a report the Senate itself
11 released a few years ago, as well as the
12 Solomon Commission report, that would suggest
13 that a lot of the credits should go by the
14 wayside and we should seek to have a broader
15 tax base and lower rates. Often -- there's a
16 lot of thought among fiscal economists and
17 tax experts on that issue, of whether tax
18 credits simply proliferate and are not as
19 effective as they're advertised.
20 However, I would say -- so without
21 necessarily endorsing any of these programs,
22 some of these programs are -- involve
23 incentivizing investments or development that
24 arguably would not occur in parts of the
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1 state where there's very little natural
2 market-rate development occurring. And we're
3 talking about largely upstate New York.
4 Whether that's a full justification for the
5 program or not is another issue.
6 But I would say there are more
7 marginal investments affected by, and perhaps
8 potentially stalled by the delays in the
9 credit, or the growing feeling that the
10 credits are not actually guaranteed, than if
11 you look at the burgeoning, very wealthy
12 motion picture, TV, and commercial production
13 industry in New York City, which is -- where
14 you basically are giving a direct, hefty
15 subsidy to companies for doing something that
16 in a lot of cases they'd be doing anyway.
17 And all the assumptions about job
18 creation related to that film credit and TV
19 and commercial production credit, all assume
20 that nothing would be happening in the
21 absence of the credit. Which is, in a word,
22 ridiculous.
23 And if there was ever an argument for
24 that credit, it was before the added
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1 infrastructure was built up, and the
2 production capabilities of the entertainment
3 industry in and around New York City early
4 in -- in the early 2000s, at least. And that
5 if there's ever been a time to pause that
6 credit, this is that time.
7 The argument would be made, Well,
8 people have lined up for this, they've made
9 plans, and they're starting productions based
10 on having the credit. But as you pointed
11 out, there are also people who have made
12 plans for other types of investments based on
13 the availability of the other credits that
14 are now going to be postponed.
15 So again, without endorsing any of
16 them in particular, I think it's really
17 questionable -- I don't think the case has
18 been made for delaying these credits and not
19 the one that's bigger than almost any of
20 them. I'm not sure whether Excelsior rivals
21 it or not in size, but ...
22 CHAIRWOMAN YOUNG: Thank you.
23 I was glad to hear that you brought up
24 the property tax cap and its positive impact
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1 on taxpayers and, you know, upstate,
2 Long Island and Westchester, other suburban
3 communities.
4 I asked Mayor de Blasio when he was in
5 the other day about a property tax cap in
6 New York, and he continues to resist it.
7 What are your thoughts on that?
8 MR. McMAHON: I think that New York
9 City becomes more complicated because New
10 York City has that four-class system which is
11 rife with increasingly bizarre inequities.
12 There's a lot of criticism of the New York
13 City property tax system. I think that if
14 you simply imposed a cap on that system, and
15 did nothing else, you might actually worsen
16 some of the inequities, because it's so
17 complicated.
18 I think in the long run it would be
19 good to cap property taxes in New York as
20 well. I would point out that New York City
21 has one element of a property tax cap in
22 place. There's actually a limit on property
23 taxes in New York, I think constitutionally,
24 or in the city charter, or both, I forget
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1 which. But the property values in New York
2 are so high, it isn't actually triggered.
3 So I think that it would be a good
4 thing in the city. However, I think that it
5 requires more careful study than simply going
6 ahead and doing it because there's so much
7 reform needed in the city's property tax
8 system -- and for that matter, as I know
9 Assemblywoman Galef would agree, in the
10 property tax systems of much of the state,
11 especially downstate counties, Nassau and
12 Westchester.
13 So I think the city is a special case,
14 but I do think ultimately that a tax cap in
15 the city should be worked into discussions of
16 needed other property tax reforms in the
17 city.
18 CHAIRWOMAN YOUNG: Exactly.
19 So the Executive Budget -- and I
20 brought this up to Director Mujica -- but it
21 contains a proposal to close a so-called
22 carried interest loophole by adding a
23 17 percent fairness fee to certain
24 compensation earned by hedge fund managers.
179
1 And I know you're aware of this. It depends
2 on other states passing a very similar plan.
3 What are your thoughts on that particular
4 proposal?
5 MR. McMAHON: Well, that proposal is
6 kind of unique in the sense that I've never
7 seen anything that was so analogous to, I
8 don't know, a hologram or just a pure symbol.
9 That tax proposal, assuming that four other
10 states will do something that at least two of
11 them would never do, is intended for purely
12 political posturing purposes, I daresay.
13 It's not going to happen, and thus it's easy
14 to propose.
15 But secondly, even if -- in principle,
16 that tax is based on the judgement that the
17 carried interest loophole needs to be
18 addressed by states, when it's actually a
19 federal-state issue, and that we're going to
20 take it into our own hands to impose a
21 17 percent punitive surcharge as a fee on the
22 incomes of people in certain types of --
23 certain types of fund managers, mainly, who
24 claim the carried-interest treatment of their
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1 income.
2 Now, I don't -- frankly, the -- I
3 think that there's a strong case to be made
4 for saying that carried interest should be
5 treated as ordinary income. The difficulty
6 in addressing it as a federal matter is in
7 distinguishing between those people for whom
8 it's clearly really a form of compensation
9 and those people in industries for whom it
10 represents money at risk.
11 But basically we're talking about a
12 federal issue here and a proposal that I
13 think is being mounted mainly in order to
14 spotlight or to stigmatize people in certain
15 industries for other purposes.
16 I'd point out one irony here. This is
17 repeatedly identified with hedge funds,
18 especially since the enactment of the federal
19 tax reform bill. There's virtually -- very
20 few, if any, hedge fund partners are going to
21 be claiming carried-interest treatment of
22 their income. The carrying period has been
23 increased from one to three years. It's
24 mainly private equity funds and other types
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1 of fund managers.
2 And again, I think a strong case can
3 be made for treating it as ordinary income.
4 The president said he wanted to treat it as
5 ordinary income. His opponents in the
6 Republican presidential primaries wanted to
7 treat it as ordinary income. Many Democrats
8 in Congress, as well as some Republicans,
9 wanted that done. It didn't happen. That's
10 one of those Washington issues.
11 But it's not an issue we can or should
12 address on a state level, and I think that's
13 another bad precedent. It's akin to the
14 windfall notion, the notion that you saved a
15 lot in federal tax, you got a windfall, we'll
16 take it. This is a different issue. We are
17 basically putting ourselves in the position
18 of saying: The feds don't tax you enough, we
19 think they should tax you at 17 percentage
20 points higher, so we'll do it.
21 Note, by the way, the reason it
22 requires four other states to act is because
23 the promoters of this idea are aware that if
24 one state did it, you would in fact have that
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1 industry essentially vacate the premises.
2 And the assumption that five states doing it
3 won't have an effect on those five states
4 assumes that the people affected don't own
5 maps.
6 And I would just say that if -- and by
7 the way, in a federal context, the revenue
8 involved is not even that large. Which is
9 not an argument against doing it, but I think
10 that it's kind of a pointless thing for
11 anything other than a political reason.
12 CHAIRWOMAN YOUNG: But as you point
13 out, so the groups that would be impacted by
14 this carried-interest loophole tax, and you
15 just said it, those are among the groups that
16 have put the accelerator to the floor in
17 leaving New York State. And so this would
18 actually make that problem worse, right?
19 MR. McMAHON: Well, I wouldn't say
20 that -- look, I wouldn't say that those
21 particular groups are like leaving the state
22 in droves or anything. If they find it
23 beneficial to be in New York now, despite our
24 tax rate even before federal tax reform, even
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1 federal tax reform won't necessarily change
2 that. You've seen individual fund managers
3 in some states make headlines by leaving and
4 actually materially affecting taxes --
5 CHAIRWOMAN YOUNG: Right. Florida
6 especially.
7 MR. McMAHON: -- like David Tepper
8 and -- and there have been people in New York
9 who you could name who have gone to Florida,
10 extremely wealthy people, without making
11 headlines or announcing their reasons.
12 There's a lot of that industry still
13 left in New York. There's also a lot of it
14 still left in Connecticut, which would feel
15 their absence more keenly.
16 But again, I would point out that for
17 now, that is a federal issue. The whole
18 federal tax scene is not settled. This is
19 just the beginning of a new round, a
20 multiyear round of tax reform at the federal
21 level. And this is not something we can or
22 should take into our own hands. This is
23 purely symbolic. The signal it sends I don't
24 think is positive. Why would we want to give
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1 another push to anybody who pays,
2 disproportionately, a heavy share of our
3 state taxes? That would be the final
4 question I'd raise about it.
5 CHAIRWOMAN YOUNG: Thank you.
6 CHAIRWOMAN WEINSTEIN: Assemblywoman
7 Galef.
8 ASSEMBLYWOMAN GALEF: Mr. McMahon, I
9 just have a question.
10 You have come forward and said that
11 you don't think the payroll option is
12 workable. Could you give us more of your
13 opinion on the charitable foundation aspect?
14 MR. McMAHON: I think if you could get
15 away with it, in the sense of having the IRS
16 sit still for it, you should -- there's no
17 harm in trying. I think the problem would be
18 that there's a real question of whether the
19 IRS, under its long-standing approach to
20 defining what's charitable and not charitable
21 giving, would stand for it.
22 I'm aware of the precedent. As you
23 probably know, for some reason the IRS has
24 allowed the State of Arizona to run four or
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1 five different charitable funds to which they
2 let people -- for which people collect
3 credits for their contributions. And in fact
4 the Times had an article, the New York Times,
5 a few years ago pointing out how under
6 certain circumstances one could even make
7 money by balancing one's contributions with
8 one's credits.
9 The IRS has allowed that, oddly
10 enough. And the proponents of this idea say,
11 We'll just do it on a bigger scale. Again,
12 and as the -- as described, which would be,
13 for instance, somebody would give money to
14 the New York Education Foundation and they
15 would receive an almost dollar-for-dollar
16 credit on their income tax for what they gave
17 to that foundation, and thus -- and they
18 would be able to deduct that contribution on
19 their federal income tax. That's the theory.
20 I think the problem is that, again, if
21 this was attempted on any large scale by
22 New York -- for instance, New York and
23 California, where it's being talked about, I
24 think the IRS would almost out of hand reject
186
1 it on the basis of their doctrine that you
2 can't receive a personal gain from a
3 charitable contribution.
4 That's why, as all of us know, if we
5 bid in a charity auction or win a prize from
6 a charity drawing, you can't claim the whole
7 cost of what you bid on or bought, you can
8 only claim a deduction for anything you
9 overpaid, in effect. If you get something,
10 you can't claim a deduction for it. That's
11 the theory, that it has to be voluntary and
12 sort of a free-will offering.
13 So I think it would ultimately make
14 for interesting litigation. If we tried it,
15 it could be structured in a way where the
16 taxpayers involved would be held harmless.
17 In other words, say the IRS strikes it down,
18 there's litigation, and the litigation
19 upholds the IRS. The people who tried to
20 claim the contribution could be kind of held
21 harmless by the state, ultimately. Frankly,
22 the whole thing would probably be enjoined
23 anyway.
24 But -- so again, my bottom line is I
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1 think it's worth trying. I don't think you
2 want to start at the local level up and
3 encourage school districts around the state
4 to go through the effort and expense of
5 creating private foundations here, there, and
6 everywhere. Creating a private charitable
7 foundation is a lot of work. I think that
8 there will be efforts to test it, and we'll
9 see what happens. So ...
10 ASSEMBLYWOMAN GALEF: Thank you.
11 CHAIRWOMAN YOUNG: Senator Krueger.
12 SENATOR KRUEGER: Thank you.
13 Thank you very much for your
14 testimony, E.J.
15 So I think you make a legitimate
16 argument that we're still not clear what the
17 federal tax reform package will mean for us
18 because they haven't even written regulations
19 and it's not clear that anyone who voted for
20 it knew what was in it either.
21 So I just want to just double-check
22 that I'm hearing you right. You're not
23 necessarily opposed to any number of the
24 proposed responses, you're just making the
188
1 argument we don't know enough yet and we
2 should have facts before we move? Because
3 your charts in your testimony actually show
4 that New Yorkers could be seeing an increase
5 in their taxes despite the advertising.
6 MR. McMAHON: Right. Right. It's
7 people mainly in the top bracket who would be
8 seeing it.
9 And even that would depend on, well,
10 were you paying the AMT -- the wealthiest
11 tend not to pay the AMT, it's the
12 near-wealthy who pay the AMT -- what's your
13 household size, are you in a pass-through.
14 The big uncertain questions are the
15 pass-through entities. The most lucrative
16 pass-through entities that you can think
17 of -- think of investment partnerships, law.
18 Right? Those two in particular, they are not
19 eligible for the pass-through tax cut.
20 On the other hand, a whole other
21 provision makes the people who by New York
22 standards are the lower-paid junior partners
23 in those entities eligible for some tax cut,
24 sorta. And then there's all sorts of other
189
1 questions. So we don't know those questions
2 about -- the answers to those questions about
3 those people. And won't know them, in some
4 cases, for some time to come. And every
5 time -- surely you've talked to people about
6 this. There's many, many questions
7 surrounding the pass-through entity piece in
8 particular.
9 I'd also point out the value of a
10 federal tax deduction is directly related to
11 the tax rate that applies to what's being
12 deducted. The tax rate that -- the deduction
13 that people are losing basically was the
14 equivalent of a 40 percent discount. The
15 C-corp rate is now going to be 21 percent.
16 That means the deduction you could take as a
17 C-corp on a payroll tax is barely half of the
18 deduction that could be taken in the top
19 bracket. And in other brackets, it's
20 somewhat different.
21 Last but not least, when we talk about
22 payroll taxes on any kind of broad basis that
23 would affect any more than a handful of
24 New Yorkers on an optional basis -- which I
190
1 think is probably the way it should be
2 structured, if possible -- that assumes that
3 the vast majority of New Yorkers are somehow
4 losing under the tax plan, when in fact most
5 of them already are seeing some uptick in
6 their weekly withholding -- and not a
7 buck-fifty. Fifty, sixty bucks for somebody
8 in that median category. Now, that's not a
9 king's ransom, obviously. But some people
10 who are in the core median family range for
11 upstate New York are going to get very
12 significant tax cuts.
13 Why should we overhaul and disrupt --
14 and the key word is "disrupt" -- disrupt our
15 entire system of taxation on a theory or
16 based on a premise that's just not true? It
17 doesn't broadly affect -- why would we do a
18 broad disruption of our tax system as a
19 response to federal tax changes that do not
20 affect a broad swath of New Yorkers, in fact,
21 in a negative way?
22 And again, I'm not a fan of the
23 federal tax cut as it's designed. I think
24 that it was a bad process. I think it was a
191
1 missed opportunity to do better. And I think
2 there were arguments against repealing SALT
3 actually on conservative grounds. But
4 that's -- what's done is done. And for now,
5 what we do should be shaped by reality and
6 not by understandably broad, you know,
7 partisan takes on what happened.
8 SENATOR KRUEGER: And I think you and
9 I agree that the people who will fall into
10 this category are the higher-income people,
11 the people with high property tax, high
12 deductions that they get capped at $10,000.
13 MR. McMAHON: Right.
14 SENATOR KRUEGER: But you in your
15 testimony for many years have talked about
16 concerns that we don't have all these people
17 leave New York.
18 MR. McMAHON: Right.
19 SENATOR KRUEGER: Right?
20 MR. McMAHON: Right.
21 SENATOR KRUEGER: So we should try to
22 do something so that they stay in New York.
23 MR. McMAHON: Right. The problem will
24 be -- that's why I -- the idea of the
192
1 foundation, if you can do it. Because here's
2 your problem. In the highest income ranges,
3 and now we're talking about people making a
4 million -- the income millionaires, which are
5 basically now just about synonymous with the
6 top 1 percent who are that 40 percent of the
7 income tax.
8 In that income range, one-third, on
9 average, of the income of state residents in
10 that bracket is wages and salaries. Another
11 19 percent is sort of business income. But
12 one-third -- actually 37 percent, if you
13 count qualified dividends -- is investment
14 income, capital gains and qualified
15 dividends. They're untouched by any scheme
16 for converting the income tax into a payroll
17 tax, or an entity-level tax.
18 SENATOR KRUEGER: Although as you
19 also, I think, raised, because of the new
20 pass-through options, you may see a whole
21 universe of individual taxpayers shifting to
22 being corporations for their pay.
23 MR. McMAHON: You could, but except
24 those people, the really -- now we're talking
193
1 about the rarified, the seven, eight,
2 nine-figure earners, quite a few of whom
3 actually are salary and bonus dependent in
4 mid-career. They're not getting the
5 pass-through cut. Their entity may be
6 getting the pass-through cut.
7 But as I mentioned earlier,
8 specifically disqualified from the
9 pass-through cut are investment partnerships
10 and law firms, medical partnerships. There's
11 a whole other provision that has the more
12 junior partners or participants in those
13 partnerships, if they've got a share, they
14 get the discount. So some people who make --
15 if married, joint -- under $310,000 a year.
16 But by the standards of the most
17 lucrative, you know, big-time New York City
18 partnerships in those businesses, those are
19 the little people, in effect. Not little by
20 most of our standards. But when we're
21 talking about income millionaires, they're
22 not directly benefiting from the direct
23 business tax cut as much. So it's very
24 uneven.
194
1 And I do think if we could find a way
2 to create an optional or elective structure
3 that allows entities to kind of opt into a
4 structure under which they find it beneficial
5 to restructure the basis of compensation, and
6 find it beneficial to pay a new state
7 entity-level tax on compensation that is
8 therefore, under existing federal law,
9 clearly going to be deductible, well, that's
10 worth taking a shot at. But that's not the
11 kind of broad thing that has been discussed.
12 SENATOR KRUEGER: Thank you. Thank
13 you.
14 CHAIRWOMAN WEINSTEIN: Thank you for
15 being here.
16 MR. McMAHON: Thank you.
17 CHAIRWOMAN YOUNG: Thank you.
18 CHAIRWOMAN WEINSTEIN: Next we have
19 Michael Kink, executive director, Strong
20 Economy for All Coalition.
21 MR. KINK: Thank you, Senator Young,
22 Madam Chair Weinstein, members of the
23 Legislature.
24 I'll also rely on submitting my
195
1 written testimony and giving an overview and
2 some thoughts. And like other folks who have
3 been testifying, I'm also going to focus on
4 the response to the federal tax plan.
5 We do know some of the consequences of
6 the federal tax plan. The federal tax plan
7 will make New York's worst-in-the-nation
8 inequality even worse. We have the worst
9 income inequality in the country, the biggest
10 division between the rich and the poor.
11 Right now, working people and low-income
12 people in New York are paying too much in
13 taxes, and extraordinarily wealthy people in
14 New York are paying too little in taxes. And
15 the federal tax bill will make that even
16 worse.
17 I think it's right for Governor Cuomo
18 and the Legislature to think about responses
19 to the tax bill, and not only in the category
20 of small changes or gimmicks or stunts that
21 will help a few people here and there, but in
22 the big picture.
23 Families in Ms. Fahy's district will
24 get enough from the federal tax break to buy
196
1 a couple of pizzas a month. Many folks in
2 Senator Krueger's district will get enough
3 for a luxury car or a yacht or a house, every
4 month. We are talking about trillions of
5 dollars that have been helicopter-dropped in
6 loads across the Upper East Side of
7 Manhattan, areas of TriBeCa and Wall
8 Street -- and the rest of the state is not
9 going to get the benefit.
10 I share many of the concerns you've
11 raised today, Chair Young, about the upstate
12 economy, about working people.
13 There are things that you can do in
14 the state response to the federal tax plan
15 that will increase economic fairness, that
16 will ask the wealthy to pay their fair share
17 and that will ensure broader prosperity for
18 all New Yorkers. You can close loopholes
19 that Congress didn't close. You can take
20 steps to make sure that New York has a fair
21 tax system and a more broadly prosperous
22 economy.
23 I will start with the carried-interest
24 loophole. We were certainly gratified to see
197
1 Governor Cuomo include it in his budget
2 proposal for the first time. This measure
3 has been carried in the Senate by IDC Leader
4 Klein, in the Assembly by Mr. Jeffrion Aubry
5 and a number of cosponsors.
6 Hedge funds and high-net-worth
7 individuals are not leaving our state. We
8 have 63 percent more millionaires right now
9 than we did when we passed the millionaire's
10 tax in 2009. I'd refer you to some of the
11 cites in my testimony about ultra-high-net-
12 worth individuals. We are gaining
13 millionaires and multimillionaires and that
14 rarified category of people that are known as
15 ultra-high-net-worth individuals. We saw a
16 15 percent increase in ultra-high-net-worth
17 individuals in New York City in just the last
18 year.
19 Now, I agree working people are
20 leaving New York. Small businesses can often
21 find it a struggle in New York. And the
22 carried-interest loophole is not going to hit
23 any of those people. There is not a single
24 working person that is going to pay a surtax
198
1 on carried interest.
2 That loophole was something that
3 President Trump campaigned on. He went all
4 over the country saying he was going to crack
5 down on Wall Street, he was going to close
6 the carried-interest loophole. And the hedge
7 fund managers and private equity managers
8 that benefit from that loophole spent
9 millions of dollars in lobbying and millions
10 of dollars in campaign contributions and
11 somehow managed to escape from a large-scale
12 tax reform with their loophole intact.
13 This legislation will be introduced in
14 nine states and the District of Columbia this
15 year. It is a response to a glaring inequity
16 at the federal level. Hedge fund
17 billionaires, private equity billionaires are
18 paying lower tax rates than teachers and
19 truck drivers.
20 These businesses are located in places
21 where they want to be in business. Anyone
22 that wants to move to Florida can move right
23 now. Some hedge fund managers have moved to
24 Florida, but they have kept their businesses
199
1 in New York City and in Greenwich,
2 Connecticut, where there is that group of
3 skilled professionals, lawyers, investment
4 pros, huge computers and mathematicians,
5 accountants. Folks fly in from all over the
6 country and all over the world to do their
7 business here. And just like Wall Street
8 claimed it would move when the Republican
9 Party tried to impose a stock transfer tax in
10 1905, and then for the next 75 years did just
11 fine while New York had a tax on Wall Street,
12 the hedge funds will complain, but they will
13 stay here and they will make billions.
14 They're making more and more money, and your
15 constituents are paying a higher tax rate
16 than they are in many cases.
17 I'd like to speak briefly about the
18 pass-through loophole. E.J. conveniently
19 failed to mention the most lucrative
20 pass-through entities, the real estate
21 pass-through entities, that just got their
22 federal taxes cut in half. Now, if you're
23 building a skyscraper in Manhattan, you
24 cannot threaten to move to Florida. These
200
1 people, again, while your constituents are
2 struggling with affordability, making rent,
3 making their mortgage, paying taxes, the
4 wealthiest real estate developers in the
5 world, who are developing the most valuable
6 real estate in the world, just got their
7 federal taxes cut in half.
8 We have had at times in our state a
9 progressive LLC filing fee structure, and
10 we've had a graduated tax on LLCs where a
11 small business structured as an LLC, a
12 dry cleaner or a plumbing contractor, would
13 not get hit with a high tax. You could
14 target a pass-through loophole closure on the
15 highest value, most wealthy individuals,
16 people that are shielding their income, and
17 it would be utterly fair, it would bring in
18 billions of dollars in revenue for the state,
19 and it would not hurt our economy one bit, it
20 would help our economy.
21 We've spoken before and we'll speak
22 again in favor of a multimillionaire tax,
23 taking some brackets for folks that make two
24 or five or 10 or $100 million a year. There
201
1 are ways in which our personal income tax
2 brackets reflect an income distribution from
3 the late '70s and early '80s that has not
4 been adjusted to reflect the explosion in
5 wealth at the top end.
6 One specific other thing that I'll
7 mention is the possibility of, yes, clawing
8 back some of those federal tax breaks. But
9 it's a rare moment where Mike Kink and E.J.
10 McMahon may agree here. You could do it
11 based on some standards. If a company
12 creates jobs or raises wages in a meaningful
13 way, bully for them.
14 But there are companies that are going
15 to use their entire federal tax break just to
16 buy back stock and make wealthy people even
17 wealthier. In the last week, Pfizer said
18 that they were going to get an $11 billion
19 benefit from this tax bill. Verizon said
20 that they were going to get a $3.5 billion to
21 $4 billion benefit from this tax bill.
22 Amazon said that they were going to get a
23 $3.2 billion a year benefit from this tax
24 bill.
202
1 Now, if Pfizer and Verizon and Amazon
2 create jobs, great for them. That's what was
3 promised. But if those companies do what
4 CNN Money says they're going to do and become
5 part of the businesses that are doing
6 $450 billion in stock buy-backs, then state
7 lawmakers might want to look at clawing some
8 of that money back.
9 Governor Cuomo's proposal targets a
10 specific sector. I would argue that it would
11 be more meaningful to look at companies that
12 don't create jobs, that don't raise pay, that
13 don't give significant bonuses, and ask them
14 to put the money straight back into job
15 creation -- into schools, into housing, into
16 dealing with the opioid epidemic, into things
17 our state needs.
18 One specific mention on the opioid
19 epidemic. We've been working with community
20 groups and healthcare groups that are
21 struggling with that on a local basis. We
22 support the Governor's proposal for a
23 prescribing tax that would deal with the
24 externalities of pharmaceuticals. I would
203
1 encourage the Legislature to look at the
2 possibility of a windfall profits tax on the
3 companies that have made billions of dollars
4 over the last decade and a half as this
5 epidemic has gained steam.
6 If you look at companies like Purdue
7 Pharmaceutical and Insys and you look at some
8 of the things that they've done to do an end
9 run around FDA concerns, if you look at some
10 of the sanctions that have been applied to
11 these companies, you'll see some bad
12 corporate behavior. And just like the
13 federal government put a windfall profits tax
14 on the oil companies after the price spike in
15 the '70s and '80s -- and for several years
16 took in hundreds of billions of dollars to
17 fund the federal government's essential
18 needs, based on profits that were gained
19 explosively -- you're dealing with the
20 consequences of a serious epidemic here. And
21 looking backwards as well as forwards might
22 be a way to do it in terms of tax policy.
23 Thank you for your time.
24 CHAIRWOMAN WEINSTEIN: Thank you.
204
1 CHAIRWOMAN YOUNG: Thank you,
2 Mr. Kink. I just had a quick question.
3 So there was a lot of time spent this
4 morning about the possibility of imposing a
5 payroll tax in New York State in response to
6 the federal tax changes, but part of that
7 would have to be that people's pretax wages
8 would have to be reduced. I was wondering --
9 you know, you represent a large coalition of
10 union members. How do you think the members
11 would feel about such a plan?
12 MR. KINK: I think the Legislature
13 should work with the Governor to insist that
14 any adjustment that is made for working
15 people is neutral, that it doesn't hurt
16 people, it doesn't take money out of their
17 pocket.
18 I think it's very clear that this kind
19 of change can be accomplished. You may need
20 a refundable tax credit, an EITC. I've heard
21 folks that are claiming it's too complex and
22 we can't get our heads around it, argue in
23 favor of incredibly complex harebrained
24 schemes to give subsidies to companies. So I
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1 disagree with those that say it's too complex
2 to work on.
3 I've heard Rob Mujica's presentations.
4 I believe that there is an intention to do it
5 fairly and right. There is obviously a role
6 for the Legislature to make sure that gets
7 done right.
8 CHAIRWOMAN YOUNG: Are the discussions
9 that you're having with the administration
10 exploring, for example, collective bargaining
11 agreements and people's pensions being
12 impacted and Social Security being impacted?
13 You know, are they coming up with fixes?
14 Because I would assume that those would be
15 prime concerns of your members.
16 MR. KINK: Sure. I know many of the
17 members of the Strong Economy for All
18 Coalition are having those discussions with
19 the Executive's office on a granular basis,
20 on a kind of global basis. They are.
21 CHAIRWOMAN YOUNG: Okay, thank you.
22 Senator Savino.
23 SENATOR SAVINO: Thank you.
24 Thank you, Michael. I want to thank
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1 you also for the work that you've been doing
2 on closing the carried-interest loophole. As
3 you point out in your testimony, Senator
4 Klein carries the bill in the Senate and
5 Assemblymember Aubry in the Assembly.
6 And it's complicated. People don't
7 understand what the carried-interest loophole
8 is. So can you just like briefly explain it?
9 MR. KINK: Sure. The investment
10 managers that benefit from the
11 carried-interest loophole are able to
12 classify their fees for managing other
13 people's money as long-term capital gains.
14 They can't have a long-term capital loss.
15 We're not talking about people that put in
16 some of their own money, we're only talking
17 about the management fee.
18 And we've worked with, you know, this
19 group called the Patriotic Millionaires.
20 They've submitted testimony today. Leo
21 Hindery, one of the most prominent private
22 equity managers in New York State, has been
23 up here to argue in favor of this. They say
24 it's just unfair. The classification is
207
1 wrong. If you can't have a long-term capital
2 loss, why would you be able to take a
3 long-term capital gain?
4 Their "two and 20" business model
5 takes 2 percent off the top of any money you
6 invest, and they keep 20 percent of the
7 profits. And they pay a tax rate on those
8 profits that is the same that you would pay
9 if they made you money.
10 Now, if you put up the money, right or
11 wrong, we treat long-term capital gains at a
12 lower tax rate than we might the fees for
13 creating an investment that gives you
14 long-term capital gains. They put their
15 money in with you, Morris Pearl says it's
16 like, you know, you get a haircut from your
17 barber and your barber claims that, you know,
18 they're part of your business.
19 It's a service. It's an investment
20 service. It's not a commingled investment.
21 And the tax rate on long-term capital
22 gains is 20 percent. The long term -- the
23 income tax rate previously on those levels of
24 income would have been 39.6 percent, it's now
208
1 37 percent. So they basically get their tax
2 rate cut in half because they claim that it's
3 carried interest.
4 SENATOR SAVINO: And why is it that
5 other states -- that it has to be done by a
6 certain number of other states, otherwise we
7 can't --
8 MR. KINK: Well, our argument, we
9 recognize that the sort of claim that these
10 companies will dance across state lines and
11 go place to place is part of the discussion
12 around any kind of tax policy treatment of
13 businesses and corporations.
14 As I said before, and as folks have
15 testified in some of these other states where
16 the legislation has been introduced, there
17 are really good business reasons to be in
18 New York City on Wall Street, in Midtown, in
19 Greenwich, Connecticut, in Chicago, where
20 there's a constellation of hedge funds, in
21 San Francisco or Los Angeles. There are a
22 lot of wealthy people. There are a lot of
23 specialized business professionals. And the
24 sort of culture of investment and
209
1 money-making is centered there in a way that
2 it's -- you know, it's productive to be
3 there.
4 These folks have not skipped across
5 state lines to flee taxes. And the regional
6 compact was designed to try to encourage all
7 of the states in a region to do it at the
8 same time. This year, the same way that
9 Governor Cuomo has backed the proposal, the
10 new governor of New Jersey, Phil Murphy, made
11 it part of his campaign, he's going to
12 include it in his budget proposal.
13 In Connecticut -- I testified before
14 the Connecticut legislature last year for
15 half an hour. We have 40 cosponsors.
16 There's a vigorous debate. There's
17 controversy. But people recognize that a lot
18 of folks in Connecticut are struggling or
19 going backwards, and the hedge funds in
20 Greenwich are doing great and just minting
21 money.
22 And so the question of fairness, you
23 know, is something that could be done on a
24 regional basis. We'll be introducing D.C.,
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1 Maryland and Virginia bills this year. So I
2 think we're recognizing that's a possibility.
3 That said, you know, if we get to a
4 serious budget crisis -- I mean, our revenue
5 estimate on this is $3.5 billion a year.
6 SENATOR SAVINO: Not chump change.
7 MR. KINK: If you got it, it could
8 close most of the budget gap that you're
9 talking about. If you decided to take a deep
10 breath and say we're going to tax these guys,
11 you know, you don't have to do the compact.
12 But I think to be responsible from an
13 economic development basis, to recognize the
14 jobs impact and to think about, you know, a
15 state-level response to a federal policy on a
16 regional basis, is a sound way to do the
17 work. Like we have a regional greenhouse gas
18 initiative, we could have a regional
19 carried-interest initiative.
20 SENATOR SAVINO: I only have a couple
21 of seconds left, but I wanted to ask your
22 opinion and the opinion of the Strong Economy
23 for All Coalition. Because you tend to
24 represent the very people that Senator
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1 Alcantara's bill would help. As you know,
2 she has a bill that would eliminate the
3 personal income tax for New York City
4 residents who earn under a certain income
5 level. Right now, more than half of New York
6 City residents earn under $50,000 a year, and
7 21 percent of New York City residents are
8 living in poverty.
9 So she has a proposal that would
10 eliminate the New York City income tax for
11 those individuals who are earning, if they're
12 single, under 32,000; if they're married
13 filing jointly, under $45,000; head of
14 household, $32,500. It would cost the City
15 of New York $352 million in lost income. But
16 as you probably heard the other day, the city
17 does have a surplus. But these are the very
18 people that your organization represents,
19 through the various groups that are part of
20 the coalition. And so again, just wondering,
21 does the Strong Economy for All have an
22 opinion on whether or not we should eliminate
23 city personal income tax for people at those
24 income levels?
212
1 MR. KINK: Right. We have not filed a
2 memo on that particular bill, and I'll take a
3 look at it for sure.
4 We have supported previously that idea
5 of reducing taxes for working people and
6 lower-income people, paired with a reasonable
7 increase on folks who can afford to pay.
8 I know now-New York City Comptroller
9 Scott Stringer had a proposal like that when
10 he was in the Assembly, where the two of them
11 go together. And I think just from a tax
12 policy purpose, I would be reluctant to
13 create a significant hole in revenue. But
14 where you can cut taxes on people that are
15 overburdened and increase taxes on people
16 that can afford to pay more and that, you
17 know, are about to get a huge federal tax
18 break, I think it's good timing if you match
19 those two together.
20 SENATOR SAVINO: Thank you.
21 SENATOR KRUEGER: Thank you.
22 MR. KINK: Thank you.
23 CHAIRWOMAN WEINSTEIN: Thank you.
24 CHAIRWOMAN YOUNG: Thank you.
213
1 CHAIRWOMAN WEINSTEIN: We've been
2 joined at the dais here by Assemblywoman
3 Earlene Hooper.
4 And our next testifier, Erin Tobin,
5 vice president for policy and preservation,
6 Preservation League of New York State.
7 MS. TOBIN: Hi, everyone. Chairwoman
8 Young, Chairwoman Weinstein, and
9 distinguished members of the Senate and
10 Assembly, thank you for the opportunity to
11 speak with you today. I'm speaking about the
12 importance of the New York State Historic Tax
13 Credit, specifically extending the credit and
14 decoupling it from the federal historic tax
15 credit.
16 My name is Erin Tobin. I'm vice
17 president for policy and preservation with
18 the Preservation League of New York State,
19 which is New York's only statewide historic
20 preservation nonprofit. And our advocacy was
21 instrumental in establishment and enhancement
22 of the New York State Historic Tax Credit
23 Program, which was established in 2007.
24 In 2013, thanks to Governor Cuomo and
214
1 the New York State Assembly and Senate, this
2 program was enhanced and extended through
3 2019.
4 Since its inception, the New York
5 State Historic Tax Credit has proven to be a
6 cost-effective economic development and
7 historic preservation incentive, and it has
8 served as a national model for state historic
9 tax credits.
10 Thanks to our New York State credit,
11 New York now leads the country in economic
12 impacts of historic tax credit-related
13 investment. In 2016, federal and state
14 historic tax credit projects created over
15 $45 million in New York State taxes, along
16 with almost $60 million in local taxes and
17 almost $143 million in federal taxes.
18 Historic tax credit projects in New York
19 State generated more local, state, and
20 federal taxes than any other state in the
21 country. In addition, these projects created
22 almost 14,000 jobs in fiscal year 2016 alone.
23 To maintain the effectiveness of the
24 New York State Historic Tax Credit, and with
215
1 the understanding that our state faces a
2 $4.4 billion deficit in 2019, the
3 Preservation League of New York State
4 respectfully requests that the Legislature
5 consider extending the program through
6 December 31, 2024, and decoupling the state
7 historic tax credit from the federal historic
8 tax credit program.
9 The New York State Historic Tax Credit
10 has particularly stimulated economic
11 development in upstate cities, towns and
12 villages. We believe that in order to remain
13 effective and to catalyze economic
14 development and investment in historic urban
15 downtowns and neighborhoods, villages, and
16 rural communities, the program must be
17 extended this year, not next year. Extension
18 in the 2018 budget will ensure that projects
19 currently in the pipeline for investment and
20 rehabilitation continue to move forward, with
21 investor and developer confidence that the
22 program will remain in place. This
23 confidence will allow continued reinvestment
24 in the urban cores, downtowns and main
216
1 streets of communities in every corner of
2 New York State.
3 Buffalo has led upstate in historic
4 tax credit investment, thanks to our state
5 program. Other cities and towns such as
6 Syracuse, Albany, Rochester, Binghamton, and
7 Jamestown are following Buffalo's lead.
8 In recognizing the economic impact of
9 the state Historic Tax Credit, the
10 Preservation League has seen municipalities
11 across New York seek program eligibility
12 through National Register Historic District
13 nominations. These nominations alone can
14 take up to a year for completion and
15 designation.
16 Among the municipalities currently
17 seeking National Register Historic Districts,
18 so they can take advantage of this credit,
19 currently set to sunset in 2019, are
20 Syracuse, Rochester, Buffalo, the villages of
21 Schoharie, Palatine Bridge and Monticello,
22 and the City of Elmira, as well as the West
23 Harlem neighborhood of New York City.
24 Without reassurance that the program
217
1 will continue beyond 2019, communities will
2 have no incentive to seek program
3 eligibility, derailing economic
4 revitalization efforts throughout upstate
5 New York.
6 The Federal Tax Cuts and Jobs Act
7 creates new obstacles to historic
8 preservation in New York State. The
9 20 percent Federal Historic Tax Credit was
10 changed in the tax reform so that instead of
11 taking the credit in a single year, investors
12 must spread out the credit over five years.
13 By requiring this five-year credit period,
14 the federal government diminished the value
15 of this credit to investors.
16 Because our New York State Historic
17 Tax Credit is linked to the Federal Historic
18 Tax Credit, defined by the federal program,
19 changes on the federal level weaken the state
20 program. Economists currently estimate that
21 by spreading the credit over five years, the
22 Federal Historic Tax Credit will have about a
23 15 percent reduction in value to historic tax
24 credit investors that contribute the
218
1 necessary capital for historic preservation
2 projects. Because of the coupling of our
3 state credit to the federal program, we
4 anticipate that the state would similarly see
5 a loss in the investment value of its credit
6 dollar.
7 The Preservation League recommends
8 that New York decouple the state tax credit
9 from the federal credit so that the state
10 program can maintain its vitality and
11 New York State can continue to see a strong
12 return on its tax credit investment.
13 Thank you for your time and
14 consideration of my testimony this morning.
15 CHAIRWOMAN YOUNG: Thank you.
16 CHAIRWOMAN WEINSTEIN: Thank you.
17 CHAIRWOMAN YOUNG: Excellent
18 testimony. And I appreciate you pointing out
19 Jamestown. And it's a very, very valuable
20 asset and economic development tool that we
21 have in New York, so I appreciate your
22 remarks very, very much.
23 MS. TOBIN: Thank you.
24 CHAIRWOMAN YOUNG: Oh, Senator Krueger
219
1 has a question.
2 SENATOR KRUEGER: Thank you.
3 I also appreciate your testimony.
4 So you're proposing that we extend the
5 existing law and that we recognize that we
6 need to decouple from the federal. But you
7 didn't comment on the Governor's proposal to
8 actually delay the paying of the credit. Do
9 you see that as having an impact on the
10 program as well, or is that not really a
11 concern?
12 MS. TOBIN: It is a concern. And
13 right now our top priority is to see the
14 program extended and decoupled. But
15 absolutely, it's the deferral; that affects
16 projects that are in the pipeline right now.
17 And we can think of almost a dozen projects
18 around New York State, at least, just off the
19 top of our head, that would be affected by
20 this deferral. And it's certainly --
21 SENATOR KRUEGER: Because they're over
22 $2 million.
23 MS. TOBIN: Right. So -- and that's
24 important, again, for investor confidence and
220
1 investment.
2 SENATOR KRUEGER: Thank you.
3 CHAIRWOMAN YOUNG: Thank you.
4 CHAIRWOMAN WEINSTEIN: Thank you for
5 being here today.
6 Next we have the New York Health Plan
7 Association, Eric Linzer, president and CEO.
8 MR. LINZER: This is my first time up
9 here, so I'm new to the area.
10 SENATOR YOUNG: We're not as mean as
11 we look.
12 (Laughter.)
13 MR. LINZER: You all seem very nice.
14 Chairwoman Young, Chairwoman
15 Weinstein, members of the joint committees,
16 thank you for the opportunity today to
17 testify. For the record, my name is Eric
18 Linzer. I'm the president and CEO of the
19 New York Health Plan Association. I'm here
20 to testify today on the provisions in the
21 Governor's proposed Executive Budget that
22 would impose a 14 percent tax on for-profit
23 health insurers.
24 We're opposed to this proposal for
221
1 three specific reasons. First, as you heard
2 from the Empire Center earlier today, this
3 proposal unfairly targets one specific
4 industry. To us, it makes very little sense
5 to target one specific industry at a time
6 when other corporations are benefiting from
7 the same changes in the federal tax law.
8 Additionally, the proposal for this
9 14 percent tax doesn't appear to take into
10 account other changes in federal tax law that
11 may actually reduce the impact of the overall
12 benefit of the changes in the federal tax
13 rate.
14 Second, health insurance costs -- or
15 taxes on health insurance in this state are
16 already too high. As you're all well aware,
17 state taxes, fees and assessments total
18 roughly $5 billion. This amount of money is
19 comparable -- essentially creates the
20 third-highest revenue generator into the
21 state budget, behind only income taxes and
22 the sales tax.
23 As you heard from the Business Council
24 earlier, New York is among the states with
222
1 the highest tax burden in the country. At
2 this time it makes little sense to us to add
3 to that difficulty and the strain that
4 businesses, particularly small businesses,
5 face. And rather than creating a special
6 piggy bank, essentially, to fund healthcare
7 programs, we need to find a better way to
8 utilize the $5 billion that's already paid in
9 health insurance taxes through, you know,
10 greater efficiencies and more effective use
11 of those dollars.
12 And third, the funding is unnecessary
13 based on the rationale for the tax. The
14 explanation for the tax has been that this
15 money is needed to protect important
16 healthcare programs in New York in the face
17 of potential federal budget cuts.
18 Fortunately, those budget cuts don't appear
19 to be materializing, as the recent
20 congressional continuing resolution that
21 passed in January included extension of the
22 Children's Health Insurance Program funding.
23 Likewise, the current congressional spending
24 bill that is now pending would extend the
223
1 funding for CHIP as well as funding for
2 Disproportionate Share Hospitals and to
3 community health centers.
4 It makes the rationale for this tax
5 unnecessary, and it raises the question as to
6 why we would create a new separate healthcare
7 fund at a time when cuts at the federal level
8 aren't materializing.
9 Finally, I think it's important to
10 recognize that these health plans, our member
11 plans play a very important role in both
12 New York's economy and the communities in
13 which they operate. These entities pay
14 billions in wages to New York residents as
15 well as hundreds of millions of dollars in
16 state and local taxes. Likewise, they employ
17 tens of thousands of individuals throughout
18 the state, particularly in upstate New York,
19 where it's been a particular challenge to
20 generate good-paying jobs.
21 Further, these entities invest in
22 their local communities, whether it's local
23 organizations or local businesses.
24 This tax on for-profit health insurers
224
1 is only going to make it more difficult for
2 those entities to operate and do business
3 here in New York, making it a challenge to
4 add new jobs and invest in their local
5 communities. And for these reasons, we would
6 urge you to oppose the 14 percent tax that
7 the Governor has proposed.
8 I appreciate the opportunity to
9 testify today. I'll be happy to take any
10 questions that the committees may have.
11 Thank you.
12 CHAIRWOMAN WEINSTEIN: I have a quick
13 question.
14 I assume you were here from the
15 beginning and heard the testimony when this
16 issue was raised with the tax commissioner
17 and the budget director. And one of the
18 justifications for this tax that we're
19 talking about now was that the current tax
20 rates, before the federal changes, were built
21 into the rate structure of the plans. And
22 that now there is this -- forgetting about
23 other changes, that there's now a lower tax
24 liability. So that their point is to capture
225
1 what was already anticipated to be paid in
2 taxes.
3 MR. LINZER: I think the answer to
4 that, Madam Chair, is twofold. If we're
5 talking about next year's rates, the 2019
6 rates, the changes in the tax rate would
7 certainly be reflected in the rates that the
8 plans would file that would be effective the
9 beginning of next year. And I think the
10 Empire Center had alluded to some of this.
11 If, however, we're talking about --
12 and I believe your question goes to this
13 point -- the rates that are currently in the
14 market, I think it's important to remember a
15 couple of things.
16 First of all, those rates were
17 approved by the state several months ago
18 prior to any changes in the tax law, and we
19 recognize that. However, there's already a
20 mechanism in place under state law that would
21 result in employers and consumers seeing the
22 benefit of the changes, and that's the
23 medical loss ratio rebate process.
24 State law requires that for individual
226
1 and small groups, that at least 82 percent of
2 the premium dollar has to be used to pay for
3 medical services. For large groups, it's
4 85 percent. So that if we don't meet these
5 thresholds or those targets, either because
6 medical costs don't reach that level or we
7 spend less on admin, we're required to pay a
8 rebate back to employers and consumers.
9 I think what's important to remember
10 here is that given the current marketplace
11 and that, say, for example, the potential for
12 potentially higher medical costs this year,
13 especially when you consider the bad flu year
14 we're already engaging in and what that may
15 do for medical costs, you know, the
16 expectation is that any benefit that may come
17 from changes in the taxes that a health plan
18 may pay in the context of the MLR rate
19 equation, you know, would be used for either
20 (a) to deal with higher than anticipated
21 medical costs due to unanticipated or higher
22 utilization or (b) if we don't meet those MLR
23 standards, we would have to send back
24 payments to employers and consumers.
227
1 So we think that's the appropriate
2 mechanism in place, you know, rather than the
3 proposal that the Governor has put forth in
4 his budget.
5 CHAIRWOMAN WEINSTEIN: Thank you.
6 CHAIRWOMAN YOUNG: Thank you for being
7 here.
8 So we had a good discussion earlier
9 with the administration and also with E.J.
10 McMahon. And one of the questions I have has
11 to do with if this windfall tax goes into
12 place, E.J. and I had talked about whether it
13 would have an impact on premiums. Could you
14 address that?
15 And if the free market were to be
16 applied, what would the impact on consumers
17 be?
18 MR. LINZER: Well, I think the impact
19 on premiums, given that the current year
20 rates have been locked in -- I think to my
21 point I had made to Chairwoman Weinstein, for
22 2018 that would be reflected in the MLR
23 rebate calculation.
24 For 2019, as plans begin to develop
228
1 their rates that we'll have to submit to DFS
2 in just a matter of a few months, the plans
3 will have to take into account what their
4 administrative costs would be. That will
5 include what we pay in taxes, fees,
6 assessments, et cetera.
7 So that if the taxes that a health
8 plan is paying are lower than what they were
9 from the previous year, that would be
10 reflected in the rates that we submit to DFS.
11 CHAIRWOMAN YOUNG: So if this windfall
12 tax were not applied and the federal tax
13 reform reductions went ahead, you're saying
14 that there would be a positive impact on
15 consumers as far as the cost of health
16 insurance policies.
17 MR. LINZER: Keep in mind, Madam
18 Chair, that it would be one factor that goes
19 into how rates get developed. You know, keep
20 in mind that when health plans develop rates,
21 there is the aspect of what you pay in taxes,
22 fees, assessments as part of the
23 administrative aspect.
24 There's also other aspects that will
229
1 have an impact on what goes into the
2 premiums. You know, certainly the cost for
3 medical services. Health insurance premiums
4 are inextricably linked to the cost of
5 healthcare. So as the cost of doctor's
6 visits, hospital stays, pharmaceutical costs
7 increase, that does have an impact on the
8 premium.
9 In addition to that, given some of the
10 other changes that are being proposed or are
11 in place -- such as the elimination of the
12 individual mandate, the proposed association
13 health plan regulations at the federal
14 level -- those will be factors that health
15 plans will have to take into consideration.
16 Likewise, the suspension of the health
17 insurance tax at the federal level for 2019
18 would also be something that would be
19 incorporated.
20 So there's a number of factors here.
21 I couldn't be able to give you a prediction
22 of what reduction in the federal corporate
23 tax rate would mean from a premium
24 standpoint, because there are a number of
230
1 other factors, most notably in the space of
2 the medical spend, that probably has a bigger
3 impact on what premiums look like than what
4 some of the administrative costs do.
5 CHAIRWOMAN YOUNG: Thank you. But if
6 there's any way that you could work it out so
7 that costs could be reduced on consumers, I
8 think that would be a great thing.
9 MR. LINZER: We agree with you
10 completely, Madam Chair. And actually
11 yesterday we had outlined a six-point
12 proposal on measures that we'd be happy to
13 talk with you and other members of the
14 various committees about ways to, one,
15 contain healthcare costs that benefit
16 employers and consumers, but also, secondly,
17 would seek to help reform the Medicaid
18 program and that $5 billion that I had
19 referenced, so that's a much more efficient
20 and effective program that ultimately we
21 don't have to have a conversation next year
22 about new revenues, but rather ways that
23 we're making sure we're getting value for the
24 dollars that the state's paying.
231
1 CHAIRWOMAN YOUNG: Thank you.
2 CHAIRWOMAN WEINSTEIN: Assemblywoman
3 Galef.
4 ASSEMBLYWOMAN GALEF: Just a quick
5 question. You mentioned the individual
6 mandate, that that's gone. How is that going
7 to impact the rates?
8 MR. LINZER: It will have some bit of
9 a -- it will have a -- let me start again.
10 It will have an impact.
11 ASSEMBLYWOMAN GALEF: Positive or
12 negative?
13 MR. LINZER: I think it would be
14 negative. You know, given -- you know,
15 certainly negative. I think the expectation
16 would be that, you know, individuals --
17 remember, the point of the individual mandate
18 was to encourage not just individuals who
19 need health insurance and need access to
20 services to participate in the pool, but
21 those who are younger, healthier, maybe less
22 apt to utilize their services. We want to
23 have a balanced pool.
24 Eliminating the mandate has the
232
1 potential to encourage some of those younger,
2 healthier individuals from participating in
3 the market. What that looks like -- you
4 know, again, the plans are just in the
5 process of beginning to develop their rates
6 for 2019. I'd be happy to come back at a
7 later date and talk with you in more detail
8 about what we're seeing from our members.
9 But it certainly will have an impact on
10 rates.
11 ASSEMBLYWOMAN GALEF: So you wouldn't
12 have supported it on a federal level.
13 MR. LINZER: You know, again, I'm a
14 month into the new job here. I do come from
15 Massachusetts, which did have and has had an
16 individual mandate for a long time. It has
17 had a benefit.
18 But remember, I think the other piece
19 to keep in mind is health insurance is
20 expensive because healthcare is expensive.
21 Getting at underlying healthcare costs,
22 dealing with the prices charged by doctors,
23 hospitals, pharmaceutical companies is an
24 important way to get at lowering premium
233
1 costs and encouraging some of those folks who
2 may choose not to participate, in the absence
3 of the individual mandate, to actually get
4 into the pool.
5 CHAIRWOMAN WEINSTEIN: Thank you for
6 being here.
7 MR. LINZER: Thank you.
8 CHAIRWOMAN YOUNG: Thank you.
9 SENATOR KRUEGER: Thank you.
10 CHAIRWOMAN WEINSTEIN: Our final
11 witness for today, Schuyler Center for
12 Analysis and Advocacy, Dede Hill, director of
13 policy.
14 MS. HILL: Good afternoon, Chairwoman
15 Young, Chairwoman Weinstein. Thank you so
16 much for this opportunity. Thank you to all
17 the members of the respective committees and
18 to everyone for hanging in there.
19 As you noted, I'm policy director of
20 at the Schuyler Center for Analysis and
21 Advocacy. We are a 146-year-old organization
22 dedicated to advancing policies that improve
23 the lives of New York families and children,
24 with a special focus on low-income families.
234
1 I'm here today to talk about child
2 poverty. One of our state's most painful
3 failures is that a quarter of our children
4 live in poverty. And those numbers are
5 higher in communities of color: One-third of
6 Latino and black New York children live in
7 poverty. And compared to the rest of the
8 country, we don't measure well. We're ranked
9 33rd in terms of child poverty around the
10 country.
11 And one more important statistic that
12 I want to mention is that of all of our
13 New York children who live in poverty,
14 65 percent of them have at least one parent
15 who's working.
16 And at this point you might be
17 wondering if I walked into the wrong hearing.
18 I recognize that Human Services was Tuesday.
19 I will note that the wait time for this
20 hearing is a little better than Human
21 Services, so I appreciate that.
22 But no, I did not sign up for the
23 wrong hearing. Tax policy can be part of the
24 solution to child poverty. And in
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1 particular, working family refundable tax
2 credits are an important way to build family
3 economic security and independence and to
4 enable families to pull themselves and their
5 children out of poverty.
6 And these credits, they encourage
7 work, because the taxpayer has to earn an
8 income in order to be eligible. The credits
9 increase with income to a point and then
10 gradually phase out.
11 Also we know that even modest boosts
12 in income for low-income families from tax
13 credits, particularly families with young
14 children, can yield tremendous benefits for
15 children, including improved physical,
16 emotional and behavioral health, higher
17 educational attainment, and increased future
18 earnings.
19 As has already been mentioned by some
20 presenters earlier, the benefits of the
21 federal tax overhaul are skewed sharply in
22 favor of high-income earners. The tax
23 overhaul is going to provide very few
24 benefits for New York's working families.
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1 And in fact it's going to increase the tax
2 burden for some of our working immigrant
3 families who will no longer be eligible for
4 the federal child tax credit.
5 And further -- and this is something
6 that Mr. Kink mentioned -- the federal tax
7 overhaul is going to expand the divide
8 between wealthy and poor New Yorkers. And
9 our state already has the dubious distinction
10 as the state with highest income inequality,
11 and this is going to deepen that divide.
12 So now more than ever, it's up to
13 New York to take the lead and tackle its
14 child poverty problem and put families on a
15 path to economic independence and security.
16 And one way to do that is to strengthen
17 New York's working family tax credits.
18 And I would like to propose today that
19 we start with the Empire State Child Credit.
20 And this is New York's version of the child
21 tax credit. And of course the child tax
22 credit, both federal and the state, is --
23 it's designed to offset the high cost of
24 raising kids.
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1 And while New York is a leader in the
2 nation in having a refundable child tax
3 credit, our credit has a very serious flaw:
4 It omits children under age 4. And as any of
5 you who have raised kids know, this defies
6 logic. Raising young kids is super
7 expensive, and young families tend to be the
8 families who are struggling the most, because
9 they're at the beginning of their career
10 ladders. They're struggling already to sort
11 of make ends meet. And yet -- and yet we
12 omit these children from our child tax
13 credit.
14 And this exclusion is out of step with
15 the growing body of research establishing the
16 critical importance of investments in the
17 early years. And also we know that
18 investments in young children pay dividends
19 later, they save the state money.
20 This year the state has taken
21 important steps to target investment in our
22 youngest New Yorkers, in implementing its
23 path-breaking First 1,000 Days on Medicaid
24 program. We suggest that the state also take
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1 the step and correct this flaw in our Empire
2 State credit. This will complement the
3 efforts of the First 1,000 Days on Medicaid
4 initiative.
5 And also another reason that this is
6 an important year to fix this flaw is that
7 the Empire State Child Credit is one of the
8 very few income supports available to some of
9 New York's immigrant families. And again, as
10 I noted earlier, the federal child tax credit
11 has just been taken away from those families.
12 It's -- just an aside about the
13 Governor's proposed budget. Currently our
14 Empire State Child Credit is linked to the
15 federal child tax credit. However, in the
16 proposed Executive Budget it's proposed to
17 keep the two linked but freeze in time the
18 link to how the federal child tax credit
19 existed prior to the tax overhaul.
20 What that is going to mean is that our
21 Empire State Child Credit is not going to
22 increase in lockstep with the federal child
23 tax credit. That, I would argue, is bad
24 news.
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1 But the good news is that our
2 immigrant families who were eligible under
3 the federal credit prior to the tax overhaul
4 will remain eligible at least for our Empire
5 State Child Credit. So that's good news.
6 What the Governor's Executive Budget
7 does not do is fill in this gap of children
8 zero to 4. And so we urge you today to
9 consider taking that up, fixing that flaw --
10 and then go a step further. We suggest that
11 you double the tax credit for young children.
12 This would put New York State at the
13 forefront in taking care of our youngest
14 New Yorkers. It would put us in line with
15 all of the literature that tells us invest in
16 kids early, it will change the course of
17 their lives for the rest of their lives and
18 will also save the state money down the road.
19 Thank you very much for your
20 attention, and I'm happy to answer any
21 questions.
22 CHAIRWOMAN WEINSTEIN: Senate?
23 CHAIRWOMAN YOUNG: Senator Krueger.
24 SENATOR KRUEGER: Thank you for your
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1 testimony.
2 And just double-checking, so E.J.
3 McMahon earlier actually called for
4 decoupling from the federal to double the tax
5 credit for children. You also support that,
6 or you don't support that?
7 MS. HILL: So it's -- I was here and I
8 was listening, and somehow I missed that. So
9 he proposed decoupling --
10 SENATOR KRUEGER: Mm-hmm.
11 MS. HILL: -- and doubling?
12 CHAIRWOMAN WEINSTEIN: No. Not
13 decoupling.
14 SENATOR KRUEGER: No, he said that --
15 I'm sorry. The Governor failed to address
16 the obvious issue, does not go out of its
17 way -- it does go out of its way to decouple
18 New York State law for a single federal tax
19 provision, the doubling of the federal child
20 credit and expansion of the income phaseout
21 for parents. Absent any changes, would
22 automatically double our Empire State Child
23 Credit from 333 to 666.
24 You support this. I'm just
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1 double-checking.
2 MS. HILL: So I am not here today
3 asking for necessarily to -- so okay, if we
4 do nothing, if the Governor's proposal is not
5 passed, then yes, our Empire State Child
6 Credit would double in lockstep with the
7 child tax credit. We certainly would not
8 oppose that.
9 That's not the -- but I would also
10 point out that we would also go in lockstep
11 with the feds, the federal government, as far
12 as excluding some of our immigrant families,
13 and that we would oppose. So -- and then --
14 but our focus today is really to fill in this
15 gap in coverage of children under age 4.
16 SENATOR KRUEGER: And is there an
17 estimated cost to the state for doing that?
18 MS. HILL: We have a very, very rough
19 back of the envelope: 200 million.
20 SENATOR KRUEGER: Thank you.
21 CHAIRWOMAN WEINSTEIN: Thank you.
22 CHAIRWOMAN YOUNG: Thank you.
23 CHAIRWOMAN WEINSTEIN: So this
24 concludes the joint budget hearing on Taxes.
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1 We will be back here Monday for the Health
2 joint hearing.
3 (Whereupon, the budget hearing
4 concluded at 1:38 p.m.)
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