Tax free or tax burden

Decoupling rolling conformity may sound like some off-beat Gwyneth Paltrow wellness technique, but it’s about how a state’s income tax laws line up with those of the IRS. And it matters a great deal now, if millions of New Yorkers will have to pay taxes to Albany on unemployment benefits they received if they were jobless during 2020.

The answer must be no. It’s going to require action by the feds and New York. Taxing government assistance for those out of work is counterproductive, and appropriately, Congress just correctly decided that the first $10,200 of unemployment compensation per person for 2020 is not subject to taxation. It was the same for all the direct payment checks from Washington during COVID.

Now back to rolling conformity. About 20 states use this method, which automatically modifies local tax law to sync with any federal tax changes as they are enacted by Congress. Another 20 or so states have “static” or “fixed date” conformity where the state has to take action to follow a federal change if it happens after a certain date. Finally, a handful of states use “selective” conformity and follow the IRS, or not, on particular provisions of the federal tax code.

New York had rolling conformity but decoupled from a few changes starting for the 2018 tax year, after Congress and President Trump unfairly limited deductibility of state and local taxes. Albany made the decoupling divorce complete a year ago, when the big COVID aid package, the CARES Act, would have done a number on the state’s finances.

Which means that the smart congressional move to not tax unemployment compensation for those with incomes under $150,000 doesn’t automatically change state law. So those benefits are still taxed by Albany. How much is that? From when the pandemic started last March to the end of 2020, there was more than $59.3 billion in unemployment paid to more than 3.9 million New Yorkers, an average topping $15,000 a person. The federal exclusion of the first $10,200 — $20,400 for a married couple — does not apply. As of now, New York State is going to tax every cent of that $10,200 or $20,400.

With a state tax rate of around 5% and a New York City rate of roughly 3%, the tax bill could be $800 a person or $1,600 per couple. The wise move is for New York to copy Congress and not tax the unemployment. But the latest COVID relief bill, the American Rescue Plan just signed by President Biden, forbids states that accept any aid money from cutting taxes. The U.S. Treasury Department must figure out how this will work.

The 50 state governments were granted a total of $195.3 billion of which New York State received $12,379,759,682 (there’s another $10,612,147,641 in local aid for New York).

Both Albany and Washington must solve this right quick, which likely means before the April 1 start of New York’s new fiscal year and budget deadline.

Gov. Cuomo needs to grab one end and Sen. Chuck Schumer the other to get it done.