New York’s SALT Follies
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.
The Main Street Case for the Working Families Tax Cuts
A broad coalition of Main Street organizations is making the case for the Working Families Tax Cut Act and what it means for the businesses that drive the American economy.
Earlier today, around 100 trade associations signed onto a letter thanking lawmakers for enacting the historic tax relief last year. The letter was organized by our Main Street Employers Coalition and highlights the bill’s real, lasting benefits to the pass-through businesses that employ the majority of private sector workers:
Making permanent lower marginal rates and the Section 199A small business deduction were key to the success of the bill. Those provisions were critical in preserving rate parity by allowing pass-through businesses to compete on a more equal playing field with their larger C corporation competitors. They also ensure Main Street companies have the certainty they need to invest and create jobs.
The Working Families Tax Cut Act also revived a number of pro-investment, pro-growth reforms that will have lasting benefits. Restoring 100 percent bonus depreciation, reinstating full expensing for research and experimentation costs, and easing interest expense caps all encourage the capital formation necessary to modernize, expand, and create jobs.
The benefits of the Working Families Tax Cuts are already flowing through the economy, but they need to be clearly communicated and reinforced. That includes hearing directly from the business owners and workers who are seeing the impact firsthand.
To that end, the Main Street Employers Coalition has launched a dedicated page to collect stories, testimonials, and real-world examples of how these policies are working. If you are a business owner or employee who has benefited, we encourage you to share your experience by clicking here.
That page also features powerful video testimonials from our friends at the American Council of Engineering Companies, Associated Builders and Contractors, National Association of Wholesaler-Distributors, National Cattlemen’s Beef Association, links to a host of resources from the Administration and Congress, and much more.
Main Street businesses are responsible for the majority of jobs and economic activity in this country, and the Working Families Tax Cuts Act is helping to drive their success. Now it’s time for them to tell their stories and get the word out.
<<Click here to download a full copy of the letter sent today>>
Hochul’s Comments in Perspective
Not to beat a dead horse, but the Governor of New York’s comments to Politico the other day are worth reviewing, if only for what they reveal about the mental state of certain political leaders. Viewing productive, successful businesses as “captives” to the tax code doesn’t strike us as the basis of a healthy relationship.
It’s also not the basis of a healthy economy. As evidenced by this nice map, New York is bleeding taxpayers and revenues and, judging from the Governor’s remarks, that’s not likely to change anytime soon.
So what did she say? Here are some highlights:
What I want to make sure we are smart about is having a system in place where it’s not just taxing for the sake of taxing.
Amen to that. The only problem is the state has not exactly been practicing what the governor is preaching here. Rather than the “smart” system described, New York is increasingly relying on a shrinking pool of high earners to fund an ever-expanding set of obligations.
And being conscious of the fact that I need people who are high-net-worth to support the generous social programs that we want to have in our state. Right?
Most states rely on their upper-income taxpayers for most of their revenue, so the financial challenge here isn’t unusual. What’s striking, however, is how one-sided her perspective is. “I need them” isn’t the same as “we need each other.” Exactly what is New York offering these taxpayers in return for all that revenue? This is also the opposite of what the Governor was saying just a few short years ago.
Now, there are some patriotic millionaires who stepped up. Okay, cut me the checks. If you want to be supportive, but maybe the first step should be to go down to Palm Beach and see who we can bring back home because our tax base has been eroded.
This paragraph has been misinterpreted. The Governor isn’t saying to be patriotic, you need to write her a check. There really is a group of trust fund babies self-labeled the Patriotic Millionaires whose whole schtick is they are willing to pay more, but only if everybody has to pay more. Rather, the Governor is making clear that this group’s vague promise of revenues that never materialize isn’t helpful – cut her a check now or convince all your transplanted friends in Palm Beach to return to New York. Don’t hold your breath for either outcome.
I have to look at the fact that we are in competition with other states who have less of a tax burden on their corporations and their individuals. And I would say remote work changed everything. There were people who could only work in an office in Manhattan or work in New York State and they were captives to our state. They were going to stay.
Back to the unhealthy relationship analogy, wouldn’t you want to make New York a place where successful taxpayers and businesses want to reside?
They’re not going there because they have a nicer governor, I know that for sure, but they’re going there because of the tax rate. We have to be smart about this. But we can fund what we want to fund with what we already are taking in.
How many times have we been assured that taxpayers don’t care about high rates and they won’t move their businesses and residences to avoid them? That is obviously not the case – we are seeing a mass migration play out in real time, and we have new economic work outlining why past research missed this narrative entirely.
So New York is at the center of the battle over public budgets and private wallets. It’s a battle that is headed to DC soon, regardless of who is in office. When it gets here, our public officials will have a choice – treat a productive segment of our economy as captives waiting to be fleeced or recognize that when it comes to sustainable tax policy, a broad base coupled with reasonable rates is the only option.
Talking Taxes in a Truck Episode 48: What Are They Thinking Out There?
On our latest episode we’re joined by Jack Salmon, Research Fellow at the Mercatus Center and contributor to The Unseen and Unsaid. Jack helps us walk through how the aggressive tax policies being considered in California and Washington State will likely shrink the tax base in those states as high earners relocate, investment shifts elsewhere, and revenue projections miss the mark. We also touch on the federal tax outlook and some of the massive fraud being uncovered in federal healthcare programs.
California Wealth Tax Misses the Target
A new paper out of the Tax Policy Network on the “one-time” California wealth tax initiative highlights just how untethered the proponents’ revenue estimates are from reality. The assumptions driving the initiative are so thin, they call into question whether this initiative is designed to raise revenue, or simply punish rich people.
Here’s the key graph:
Where do the estimates come from? The group of economists who helped construct the wealth tax proposal used a back-of-the-envelope calculation to estimate how much revenue it would raise: they started with the Forbes billionaire list to guesstimate how much wealth is held by the targeted billionaires, subtracted 10 percent for tax “avoidance and evasion,” and multiplied by 5 percent. The result was a revenue estimate of nearly $100 billion.
A competing analysis using real analytic tools showed a much smaller tax haul — negative, in fact, if you include the anticipated deterioration of the income tax base.
Who’s right? You decide.
Here’s the complete analysis from the wealth tax advocates, which includes our old friend Emmanuel Saez:
The Forbes billionaire list has 213 California billionaires with a collective wealth of $2.182 trillion (which is 26.6% of the US wide $8.189 trillion owned by all 938 US billionaires). A 5% tax on $2.18 trillion raises $109 billion. Factoring in 10% of tax avoidance and evasion leads to a scoring of $99 billion that we round to $100 billion for simplicity.
That’s it. This is the analysis that is going to cost California billions, whether it passes or not, and they couldn’t even be bothered to toss in a couple of footnotes?
Contrast those three sentences with the work of Rauh, et al. They also start with the Forbes list but then adjust to reflect residency and other factors. They then:
- Subtract the value of residential real estate (exempt under the proposed tax).
- Subtract those billionaires who have already left the state.
- Subtract the anticipated behavioral response of the targeted billionaires, including relocation, tax planning, and avoidance.
The result is a projected revenue gain of just $40 billion, or less than half what the voters of California are being promised. But that’s just the wealth tax side of the analysis. What impact does the resulting migration and tax avoidance have on other taxes?
The authors estimate the income taxes paid by the targeted billionaires and then calculated the net present value of the taxes no longer paid by those who leave the state or otherwise change their behavior. Applying “reasonable assumptions about discount rates, mobility effects, etc.,” they conclude that the next present value of the wealth tax could be negative.
So California’s one-time wealth tax could result in a permanent loss of revenue to the state. Instead of helping reduce the state’s budget deficit and lower the burden on the middle class, the initiative will do the opposite. Revenues from the rich will fall and the middle class will be left to pay the difference. Meanwhile, all those wealthy taxpayers will be sunning themselves in Florida and Texas, paying no income tax whatsoever, and not being punished at all.