Tax Reform in New York

April 22, 2014

New York's tax reform reduces corporate tax burdens and complexity, says Joseph Henchman, a policy analyst who supervises the Tax Foundation's state policy and legal programs.

Governor Andrew Cuomo signed New York's 2014-2015 state budget into law at the end of March, making major reforms to the corporate and estate tax systems. New York's corporate tax system was recently ranked 25th out of the 50 states in the 2014 State Business Tax Climate Index. Had these latest tax changes been in effect, New York would have ranked 4th best of all the states for corporate taxes, losing only to three states with no corporate income tax at all.

New York is absolutely a high tax state. But high taxes need not be complex. By broadenings its tax base, lowering rates and eliminating unnecessary complexity, New York has made significant and important changes to its tax system.

  • The bill drops the corporate tax rate from 7.1 percent to 6.5 percent. This is the lowest rate that New York businesses have seen since 1968.
  • In New York, corporate taxpayers pay the highest of four tax bases -- either the 7.1 percent tax on net income, a 0.15 percent tax on capital base, a 1.5 percent alternative minimum tax (AMT), or a fixed dollar tax of up to $5,000. The new law repeals the AMT (effective 2015) and phases out the capital stock base, beginning in 2016.
  • The bill gives businesses a deduction for taxes paid to foreign governments, preventing double taxation.
  • New York previously had two business tax systems, with divergent definitions, rules and standards for each. The new bill merges them into one system.
  • The law establishes an "economic nexus" standard, meaning that corporations are taxed based on customers, not based on the existence of property or employees. An out-of-state corporation with a partner in New York is only considered to have economic nexus with New York if the base of the interest is greater than $1 million.
  • The new law retains the 16 percent estate tax top rate but increases the exclusion amount to $2 million immediately. It will rise to $5,250,000 by April 2017.
  • It repeals the generation-skipping transfer tax, a tax that was intended to prevent estate tax avoidance through property transfers to grandchildren.
  • The individual add-on Minimum Tax -- a burdensome tax that yielded very little revenue -- is repealed.

Source: Joseph Henchman, "New York Corporate Tax Overhaul Broadens Bases, Lowers Rates, and Reduces Complexity," Tax Foundation, April 14, 2014.

 

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