As the NY State Assembly extends the debate over its budget, here’s more on the SALT Parity “haircuts” included in their plan. These haircuts will hurt thousands of small and large New York pass-throughs, accelerate the “highest in the nation” taxpayer migration out of the state, and give credence to the PTET critics. In other words, they’re a really bad idea.
S-Corp initiated its SALT Parity campaign to level the playing field with large public C corporations. Under the federal SALT cap, C corporations continue to deduct their SALT whereas most of the state and local taxes paid by pass-throughs are subject to the new cap. To fix this, thirty-six states have enacted our SALT Parity laws.
NY enacted their version back in 2021. (NYC followed suit in 2022.) Both allow S corporations and partnerships to pay their state/city income taxes at the entity level (PTET), restoring the federal tax deduction and leveling the playing field with their C corporation competitors. To protect the business’ owners from double taxation, the law gives them a tax credit equal to the PTET.
The legislation before the NY Assembly would roll back that benefit by giving a “haircut” to the credit. As summarized by EY:
The Senate Bill (Part GG) would also reduce the PTET credit to 90% for NYS purposes (Part RR) and to 75% for NYC purposes. The Assembly Bill (Part OO) only provides for the reduction of the NYC PTET credit, limiting it to 75%. These provisions would be effective June 1, 2026, and appear to be effective for PTET tax year 2026 and forward (note the due date for the NYS and NYC PTET elections for the 2026 tax year is March 16, 2026.). Because the NYS PTET uses a marginal rate structure, partners that pay a lower marginal tax rate than their partnership will face a proportionally more significant state tax increase from the credit limitation.
In effect, New York is taking a portion of a tax benefit meant for employers and putting it into the state and city coffers instead. That’s bad for New York businesses and bad for tax policy.
Punishing NY Employers
New York enacted its PTET back in 2021 and, from the beginning, the elections were widely popular:
As of 2025, according to the state Department of Taxation and Finance, nearly 100,000 entities had opted to pay New York’s state PTET tax, which, in fiscal year 2026, is expected to raise $16 billion. All that money ultimately will be refunded to entity partners and shareholders via PIT credits.
Now NY is looking at a broad package of tax hikes, including confiscating a portion of the PTET benefit through the credit haircut. As noted by a large group of NY-based business trades, the burden of these hikes will fall on employers both large and small:
Like nearly all other state PTET regimes, New York’s PTET credit equals 100% of the PTET paid by the pass-through entity. These regimes were designed to create a level playing field for pass-through businesses, which were uniquely harmed by the SALT cap…. [I]f this credit is reduced so that it is no longer dollar-for-dollar, the burden will fall not on a wealthy individual’s take-home pay, but on a small business owner’s ability to pay their workers, grow their business, and support their communities.
These tax hikes couldn’t come at a worse time for the state as NY already is bleeding taxpayers. As this graphic illustrates, NY is losing more taxpayers than any other state in the country.
The reasons for this exodus are multi-fold, but the state’s tendency to overtax businesses is clearly a big part of the problem. The Tax Foundation scores NY as the worst in the nation when it comes to tax competitiveness, beating out strong applications by New Jersey and California. The state also relies heavily on wealthy taxpayers to finance its spending. This from the Manhattan Institute:
As of 2023, the 68,570 New York households with incomes above $1 million represented 0.7% of all resident PIT filers and earned 26% of adjusted gross income (AGI) while generating 41% of the total income taxes paid by state residents, according to the state Department of Taxation and Finance.
So much for the rich not paying their fair share. How bad are taxes in NY and NYC? Here’s a nice Manhattan Institute graph showing just how high they go when you pay the top rates and operate in NYC:
Remember, these rates are on top of any federal taxes owed and they provide a strong incentive for successful New York businesses to pack up and move elsewhere. The full PTET deduction helped mitigate that incentive, and now they are thinking about reducing it.
PTET Critics
Debate over the Working Families Tax Cut Act included efforts to roll back our SALT Parity bills. Critics argued the policy was a loophole used to generate state revenue at the expense of the Federal Treasury. Here’s the Tax Foundation on that point:
The Senate cracks down on some states’ practices of using PTETs as a revenue generator. Some states impose higher rates for entity-level taxes, either by taxing all income at a flat rate equal to the top rate of the graduated-rate income tax, or by imposing a separate higher rate. Businesses sometimes elect to pay this higher rate because it yields federal tax savings that exceed the additional state burden…
As we noted at the time, the examples used were not as clear-cut as described. The PTET rate in Wisconsin, for example, was selected because the state already allowed pass-throughs to pay at the entity level, using the slightly higher corporate rate. A similar response applies to concerns regarding the use of a flat PTET rate versus using a progressive scale. It was done for simplicity and to avoid gaming at the state level.
On the other hand, imposing a haircut on the PTET credits is clearly an effort by states to siphon off tax benefits at the expense of the federal taxpayer. Massachusetts is guilty of engaging in this scheme, and now New York is thinking about doing something similar.
These haircuts are a bad idea. They raise taxes on Main Street businesses and increase the odds Congress takes steps to address them. That would mean no PTET benefits for NY pass-throughs, or anybody else for that matter, including NY State.