New York Passes Largest Budget in the State’s History

New York Governor Kathy Hochul and other legislative leaders have struck a deal for the 2023 fiscal year on the state’s $220 billion budget, the largest ever in New York State’s history. The state Senate and Assembly passed their respective budget bills late last week which were then signed by the Governor earlier this week. However, unlike the previous years’ budgets, which contained significant tax increases for higher income earners and incentive programs to aid in the COVID-19 pandemic recovery, this year, New York State is flush with cash from the $26 billion in federal pandemic funds and greater-than-expected tax collections it has received over the past year. As a result, the tax changes under the new budget are not as expansive as in the past couple of years, but still contain some noteworthy provisions as highlighted below.

Noteworthy Budget Provisions: 

• Acceleration of the phase-in of the middle-class tax cut that was originally scheduled to start in 2025. This tax cut drops the tax rate on incomes up to $161,550 from 5.85% to 5.5% and incomes up to $323,200 from 6.25% to 6% starting in 2023.
• Modification to the Pass-Through Entity Tax computation beginning in tax year 2022 for S corporations, which will now include total income for New York resident shareholders when all entity shareholders are New York residents (“electing resident S corporation”), rather than limiting the tax to New York-sourced income as was policy in 2021.
• Creation of a new, optional New York City Pass-Through Entity Tax for partnerships, with at least one New York City resident partner, and resident S corporations. The tax will be imposed at the city’s highest personal income tax rate of 3.876% and will contain an offsetting individual tax credit. For those choosing to opt in, an annual, irrevocable election by March 15th will be required. The new tax will be offered starting in 2023.
• Increase in the current small business modification to 15% for sole proprietorships with incomes of less than $250,000, and expanding the program to include other entities, such as limited liability companies, partnerships and S corporations with New York-sourced income of up to $1.5 million, thereby reducing the amount of income counted as taxable net income.
• Provision of tax credits up to $25,000 for installation costs (50% of qualifying capital costs) related to hand sanitizer stations, physical barriers and air purification systems incurred during the period of January 1, 2021 through December 31, 2022 at a New York business location for those small businesses that are still experiencing economic difficulties due to the pandemic.
• Institution of a six-month “gas-tax holiday” from June 1 through December 31, 2022, saving motorists at least 16 cents per gallon, the 8-cents per gallon sales tax (8.75-cents per gallon within the Metropolitan Commuter Transportation District) and the 8-cents per-gallon motor-fuel tax – at the pump. However, the larger, 17.3-cents per gallon petroleum tax will still remain in effect.
• Establishment of a new property tax rebate credit for eligible residents earning less than $250,000 per year. The amount of the credit is the amount of the STAR tax savings in the 2021-2022 school year multiplied by a percentage ranging between 18% and 163% (100% to 125% for New York City residents), depending on the taxpayer’s qualified gross income amount.
• Allowance for New York marijuana companies to claim a deduction for ordinary and necessary business expenses that are disallowed under federal tax provisions due to the continued status of marijuana as an illegal substance.

In addition, another item of importance relating to the budget is the notable exclusion of an extension of the state’s 421-a real estate tax abatement program for new apartment buildings. The program provides billions in tax savings for developers during the construction phase and up to 25 years after the completion of a real estate project in exchange for the inclusion of affordable housing units within the project. The program is set to expire in June 2022.

If you have any questions with regard to how New York State’s 2023 fiscal year budget affects you or your business, please contact Alan Goldenberg, Principal and Leader of Anchin’s State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.