News Briefings - State Taxes

The following article was taken from the 12/22/2008 issue of State & Local Taxes Weekly.

12/22/08 -- New York Governor Paterson delivers 2009-2010 proposed executive budget--"eliminates largest deficit in State history"

by Gina M. Briggs, Esq. (RIA)

ON December 16, 2008, Governor David A. Paterson delivered his 2009-2010 Executive Budget. The proposed budget, which was delivered more than one month before the state constitutional deadline, aims to eliminate the "largest budget deficit in State history." The budget proposal focuses on recurring spending reductions, but includes "targeted increases in revenue" to address an "unprecedented fiscal and economic crisis." The proposed budget does not include, however, any broad-based income tax proposals; rather, it focuses on closing loopholes, enacting specific sales and use tax changes and increasing or creating fees or fines for specific activities. (Governor's Office, Press Release, 2009-2010 Proposed Budget, 12/16/2008; Governor's Office, Revenue Actions, 2009-2010 Proposed Budget, 12/16/2008)

STAR rebate and exemption programs. The Executive Budget proposes the elimination of the STAR rebate program at a savings of $1.4 billion for the 2009-2010 fiscal year. In addition, the proposal would eliminate the corresponding enhanced New York City personal income tax credit. With these changes, the value of the credit will return to pre-rebate levels, declining from $290 to $125 for married couples and $145 to $62.50 for individuals. Funding for the STAR exemption program, which shields a portion of an individual's assessed home value from local property taxation, as well as the standard New York City rebate would remain unchanged.

Empire Zone Reform. The Executive Budget proposes that all of the current Empire Zone program participants be required to demonstrate that they are producing at least $20 in actual investments and wages for every $1 that the state invests in the program in order to remain in the program. The reformed program will continue until its sunset date of June 30, 2011, excluding certain sectors such as utilities, retail, and real estate from future participation.

Sales tax changes. The proposed budget creates a new, additional 18% sales tax on non-diet soft drinks (the "obesity tax"), with the revenues directed to health care. The budget also proposes the elimination of the state sales tax exemption on clothing and footwear under $110, and replaces that exemption with two exemption periods during which clothing and footwear under $500 would not be subject to sales tax. Additional sales and use tax changes include: imposing a sales tax on cable and satellite TV/Radio services; taxing personal services, such as barbering, massages and hair salons, and credit rating services (in conformity with current New York City practice); repealing the sales tax cap on gasoline; and permanently increasing the assessment on utility companies from 1/3 of 1% to 1% of gross intrastate revenues plus an additional 1% temporary surcharge. The Executive Budget also proposes: limiting the capital improvement exemption to new construction; imposing sales tax on cable and satellite television and radio; increasing the sales tax on luxury goods; imposing a sales tax on entertainment-related consumer spending, including, but not limited to, movie theaters and sporting events; extending the sales tax to transportation-related spending, such as limousines and buses; closing the "digital property taxation loophole;" repealing bad debt provisions that allow private label credit card lenders (i.e., department stores) to reclaim sales tax revenues from debts that are not repaid; and expanding the definition of affiliate nexus for Internet sales.

Change to treatment of sales of partnership interests by nonresidents. Under the proposed budget nonresidents would be required to include gains from the sale of entity interests as New York-source income if the gain is from sales of real property located in New York. Under current law, nonresidents can create partnerships to sell a property located in New York State and then sell their partnership interest, which is not taxable for a nonresident because it is considered intangible income.

Miscellaneous provisions. Eighty-eight new or increased fees are recommended in the budget, most of which would finance specific activities and/or have not been changed in several years. In addition, ten new fines have been proposed that are intended to discourage illegal or dangerous behavior and improve public safety. Other tax proposals include: addressing abusive tax avoidance; limiting the itemized deduction for millionaires; reforming the cigar tax; expanding the tax on nonresident hedge fund income; increasing beer and wine tax rates; increasing the prepaid sales tax rates on cigarettes; eliminating underutilized tax credits; and increasing the auto rental tax.

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