A GUIDE TO NEW YORK STATE TAXES: History, Issues and ...

A GUIDE TO NEW YORK STATE TAXES:History, Issues and Concerns

A Guide to New

York State Taxes: History, Issues and Concerns

Marilyn M. RubinFebruary 2011

A GUIDE TO NEW YORK STATE TAXES: HISTORY, ISSUES AND CONCERNS

Marilyn Marks Rubin John Jay College February 2011 Funded by the Peter J. Solomon Family Foundation Marilyn Marks Rubin Peter J. Solomon Professor Chairman John Jay College Peter J. Solomon Company City University of New York 520 Madison Avenue 445 W. 59th Street New York City, NY 10022 New York City, NY 10019 (212) 508-1600 (212) 237-8091 [email protected] [email protected] http://www.pjsolomon.com

Preface

The Guide to New York State Taxes is a companion to the Guide to New York City Taxes published in December 2010. The origin of the City Guide is a report on NYC taxes prepared for me by Dr. Marilyn Rubin, a consultant to my office when I was Deputy Mayor for Economic Policy and Development under Mayor Edward I. Koch.

In the late 1970s, New York City and State were in the midst of a fiscal crisis – much like today. Decisions on taxes were then and are now essential to the vitality of the State and City, yet those making policies and opining on them often do not have sufficient knowledge. We hope that this Guide, clearly defining the history of NYS taxes, their rates and bases, who pays them and the issues associated with each will allow more informed tax policy decisions and a better understanding of the effect of changes.

Dr. Rubin prepared the 2011 NYS Guide and its companion NYC Guide with a grant from the Peter J. Solomon Family Foundation under the auspices of John Jay College where she is a Professor of Public Administration and Economics and Director of the MPA Program. Dr. Rubin is an expert on state and local taxes and is an elected fellow of the National Academy of Public Administration (NAPA), chartered by the U.S. Congress to help government leaders build accountable, efficient and transparent organizations. I am indebted to Dr. Rubin for her thorough and thoughtful analysis. Her colleague, Dr. Catherine Collins at George Washington Institute of Public Policy, provided extensive input into the report. Adjunct faculty members at John Jay College, Caroline McMahon and Michael Walker, assisted in data collection and in the preparation of the Guide as did Annemarie Eimicke and Dov Horwitz, former students in the College’s MPA Program. Dr. Rubin and I are grateful to the many professionals who have read and commented on the State Guide including several experts in NYS agencies dealing with State taxes. We thank Stephen Solomon and Kenneth Moore of Hutton & Solomon, LLP, for their input on some of the more technical aspects of the State’s taxes and the many associations and companies that have provided comments on sections of the Guide and data used in its exhibits.

In closing, the work is ours and, while we have received many helpful suggestions from the persons listed above, we bear full responsibility for its accuracy and completeness. We welcome comments.

Peter J. Solomon Chairman, Peter J. Solomon Company, L.P.

February 2011

CONTENTS

Executive Summary ……………………………………………………………………… i

Personal Income Tax …………………………………………………………………….. 1-1

Sales/Use Tax ……………………………………………………………………………. 2-1

Cigarette/Tobacco Products Tax ……………………………………………………….. 3-1

Alcoholic Beverage Tax …………………………………………………………………. 4-1

Motor Fuel Tax ………………………………………………………………………….. 5-1

Highway Use Tax………………………………………………………………………… 6-1

Auto Rental Tax …………………………………………………………………………. 7-1

Corporation Franchise Tax ………………………...…………………………………… 8-1

Corporation and Utility Tax ……………………………………………………………. 9-1

Insurance Tax ……………………………………………………………………………. 10-1

Bank Franchise Tax …………………..…………………………………………………. 11-1

Petroleum Business Tax …………………………………………………………………. 12-1

Real Estate Transfer Tax ………………………………………………………………... 13-1

Estate Tax ………………………………………………………………………………… 14-1

Executive Summary

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EXECUTIVE SUMMARY

Introduction

The purpose of the Guide to New York State Taxes is to provide information on State taxes to a wide range of readers in a format that is broad in scope and non-technical in presentation.

The State has several websites that present information on NYS taxes including the annual Handbook on New York State and Local Taxes and the Economic and Revenue Outlook that accompanies the annual Executive Budget. Both describe the NYS tax structure, but neither provides a broad non-technical picture of State taxes, showing their structural elements as well as other relevant details – how they have evolved over time, how much revenue they generate, how they compare to similar taxes imposed in other states and whether local governments impose a similar tax.

The Guide presents this information for the State’s major taxes as of Fiscal Year 2010.1 It also discusses issues and concerns that must be addressed if NYS is to maintain its competitive position as a place to conduct business and its reputation as a desirable place to live.

Taxes and Other NYS Revenue Sources

Taxes are the main source of NYS revenues. In FY2010, of the $126.9 billion in total State revenues, 45.5% was attributable to taxes (see Figure 1).

NYS levies 14 major taxes including the Personal Income Tax, the Sales/Use Tax, five business taxes, five excise taxes, and two transfer taxes. Exhibit 1 at the end of this section shows the revenues from each tax.

Personal Income Tax. The Personal Income Tax (PIT) is the primary NYS tax source, accounting for 60.1% of State tax revenues and 27.4% of total State revenues in FY2010 (see Figure 2). The tax is imposed on NYS residents and on non-residents with income attributable to NYS sources. Non-residents generate more than 15% of State PIT revenues.2

Sole proprietors, partnership members and S Corporation owners/shareholders are subject to the PIT rather than to a NYS business tax. For sole proprietors, the PIT is imposed on business net earnings. For partnership members, the tax is imposed on their distributive share of partnership income. Limited Liability Companies (LLCs) are taxed as partnerships under NYS Tax Law unless they choose to be treated as corporations. For S Corporations, income passed through to individual owners/shareholders is subject to the PIT. Mobility Tax. Effective 2009, NYS imposed the Metropolitan Commuter Transportation Mobility Tax, a payroll tax on most employers3 and self-employed individuals conducting business in

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NYC and the other 7 counties in the MCTD: Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester. NYS distributes all proceeds from the Mobility Tax to the MTA.

Personal Income taxes, such as the State PIT, are always paid by individuals. Payroll taxes may either be withheld from employee wages or paid from the employer's own funds. For the Mobility Tax, employers are prohibited by law from deducting any portion of the tax from employee wages or compensation.

The Mobility Tax rate is 0.34%. For individuals, the tax is imposed on net earnings from self-employment allocated to the MCTD.4 Partners – including members of LLCs treated as partnerships for purposes of the Federal Income Tax – are subject to the tax on net earnings allocated to the MCTD. Corporations, including S Corporations, pay the tax on the payroll of workers employed in the MCTD. Distributions to S Corporation owners/shareholders are not subject to the Mobility Tax. Sales/Use Tax. The second largest source of NYS tax revenues is the Sales/Use Tax. It generated $10.5 billion in FY2010, accounting for 18.2% of NYS tax revenues and 8.3% of total State revenues. The Sales Tax is imposed on the sale of most goods purchased in NYS and on enumerated services provided in the State. The Compensating Use Tax is imposed on purchases made outside of the State and brought into it for use. Business Taxes. The third largest source of NYS tax revenues comes from business taxes imposed on general corporations, banking corporations, insurance companies, utilities and petroleum companies. In FY2010, the five taxes generated $7.5 billion, accounting for 12.9% of NYS taxes and 5.9% of total State revenues. Business tax revenues include receipts from the temporary 17% surcharge imposed in 1982 on corporate taxpayers conducting business in the MCTD. As discussed above, corporations doing business in the MCTD are also subject to the

0.34% Mobility Tax on the payroll of workers employed in the MCTD.5

Excise Taxes. NYS levies excise taxes on selective commodities or transactions – cigarettes, alcoholic beverages, motor fuels, highway use, and auto rentals. In FY2010, the State’s five excise taxes generated $2.3 billion in revenues, accounting for 4.0% of NYS taxes and 1.8% of total revenues.

Transfer Taxes. The two other major taxes imposed by the State are the Real Estate Transfer Tax (RETT) and the Estate Tax. In FY2010, the RETT generated $493 million, accounting for 0.9% of tax revenues and 0.4% of total State revenues. The Estate Tax produced $866 million, accounting for 1.5% of tax revenues and 0.7% of total State revenues.

Trends in NYS Tax Revenues

NYS collected close to $58 billion from all taxes in FY2010, an increase of 37% over FY2000. These revenues are, however, in current or nominal dollars that do not take inflation into account. Constant dollar revenues are adjusted for inflation and show real tax changes over time. FY2010 constant dollar revenues were 7% above those in FY2000 but 9% below the peak reached in 2008 (see Figure 3).

Because of the predominance in the NYS tax base of the PIT and other economically sensitive taxes, constant dollar tax revenues closely track economic conditions in the State6 (see Figure 4).

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Local Government Taxes

State taxes must be considered in conjunction with local government taxes to determine the total tax burden in NYS. More than half of total taxes paid in NYS are collected by local governments.7

The Real Property Tax (RPT) is the primary source of local government revenues. In FY2009, it accounted for 78% of local government tax revenues and 41% of total local government revenues, with the exception of NYC (see Figure 5). NYC is excluded because its revenue structure differs significantly from that of all other jurisdictions in the State.

In addition to the Real Property Tax, NYC is the one local government in NYS authorized to levy a personal income tax, business income taxes and several other taxes.8 The City of Yonkers also levies an individual income tax. Certain other local governments including cities, counties, and school districts are authorized to impose sales/use taxes, taxes on hotels and mo- tels, real estate transfer taxes, mortgage recording taxes and utility taxes.

Real Property Tax. The Real Property Tax (RPT) is levied in more than 4,700 taxing jurisdictions in NYS based on the value of residential and non-residential real properties with certain exceptions.9 Reliance on the RPT varies by type of government. In FY2009, counties received 23% of their revenue from the

RPT, cities 25%, towns/villages 53% and school districts 53%.10

Included in the school districts’ RPT share are payments received from the NYS School Tax Relief (STAR) fund, one of the State’s several Special Revenue Funds discussed later in this section. STAR is supported by a portion of NYS Personal Income Tax receipts. Excluding STAR payments, the RPT accounted for 46% of school district revenues in FY2009.

The State and the RPT. Although NYS does not levy a State real property tax, it has a major role in determining the structure and administration of local property taxes. Some of the State’s regulations allow local governments discretion in their adoption. Other regulations are mandatory, either constitutionally or statutorily.

The expansive role of the State in local property taxation and in all other taxes is explained by what is known as Dillon’s Rule. Established in 1872 in a treatise on municipal corporations authored by Iowa Supreme Court Judge John F. Dillon, the Rule dictates that municipalities are limited to powers explicitly given to them by the state. The creature of the state principle remains the legal doctrine governing current state-city relationships throughout the U.S., as modified by individual state laws permitting home rule.

Most states, including New York, have modified Dillon’s Rule by providing home-rule powers to certain or all local governments, either under their constitutions or by statute. Home-rule

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municipalities are taken out from under Dillon’s Rule and permitted to operate under their own charter which establishes local governance and administrative practices. In general, however, home-rule authority does not extend to autonomy over the power to tax. Other than setting annual Real Property Tax rates – and even this action is taken within NYS constitutional and statutory constraints – local government actions related to the RPT and to other taxes are subject to initiation or approval by the Governor and State Legislature with the exception of the assessing function. The State provides guidance for assessment but cannot tell local assessors what an assessment should be. Only the courts or a locally appointed appeals body may do so. Dedicated Tax Revenues

Unlike most private sector entities that keep a single set of accounts for all transactions, governments generally divide their financial resources into separate accounting entities called funds. Receipts that flow into these funds are derived from several sources including state taxes. General Fund. The majority of NYS tax revenues are deposited in the State’s General Fund, the primary operating fund of the State. The revenues in the General Fund are available to pay for most purposes that the State is legally empowered to pursue.

Budgetary shortfalls always refer to the gap between revenues and expenditures in the General Fund.

Other Funds. NYS revenues also flow into other funds which are available for certain operations but have statutory restrictions on their use.11 Special Revenue Funds. Special revenue funds are earmarked for specific purposes and are supported by dedicated taxes and other revenue sources. An example of a special revenue fund is the NYS School Tax Relief Fund (STAR).

STAR provides Property Tax relief for State residents with incomes below a certain level by exempting a portion of the taxable value of their primary residence from local school district property taxes.

NYC residents – both owners and renters – with annual incomes below a certain level are also eligible for a refundable STAR credit against City PIT liability.

STAR is financed by a dedicated portion of NYS Personal Income Tax collections that are used (1) to reimburse school districts for forgone Property Taxes resulting from STAR reductions to the taxable value of taxpayer properties; and (2) to reimburse NYC for forgone revenues resulting from the STAR credit taken by taxpayers against their City PIT liability.

Debt Service Funds. Debt service funds are established to cover interest and repayment of principal on the State’s general obligation debt, special obligation debt, lease purchases, and contractual obligations. An example of a debt service fund is the Local Government Assistance Tax Fund (LGATF).

To eliminate annual cash flow borrowing in the first quarter of each fiscal year, 1990 legislation authorized the Local Government Assistance Corporation (LGAC) to issue bonds to finance payments to local governments previously funded by the State. By 1995, the Corporation had issued its entire authorization. LGATF revenues are dedicated to the payment of debt service on outstanding LGAC bonds.12

LGATF is financed by a dedicated portion of NYS Sales/Use Tax receipts. All revenue in excess of the aggregate amount required for debt service payments must be deposited in the General Fund.

Capital Projects Funds. Capital projects funds finance the acquisition and construction of State facilities and projects and provide financial assistance to local governments and public authorities. An example of a capital projects fund is the Dedicated Highway and Bridge Trust Fund (DHBTF).

The Dedicated Highway and Bridge Trust Fund supports transportation projects such as the reconstruction and preservation of

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NYS and local roads. The Fund is also used to pay debt service on State-supported Dedicated Highway and Bridge Trust Fund Bonds.

The DHBTF is financed by dedicated receipts from the Motor Fuel Tax, Highway Use Tax, Auto Rental Tax, Petroleum Business Tax, a portion of the Corporation and Utility Tax, and by motor vehicle fees.

Exhibit 2 provides information concerning the NYS taxes dedicated to the Special Revenue, Debt Service, and Capital Projects Funds. Although fund revenues are meant to be used solely for purposes described in their authorizing legislation, special language may allow for transfer of funds, particularly to the General Fund.

Tax Expenditures

Tax expenditures can be defined as government spending through the tax system. They result in revenue losses to government attributable to tax law provisions that permit taxpayers to reduce their taxes by subtracting exclusions, exemptions and deductions from their gross income, applying tax credits against their tax liability, taking tax deferrals and using preferential tax rates.

Exclusions, exemptions and deductions reduce taxable income. For example, Bank Taxpayers are allowed a net operating loss deduction (NOLD) – subject to certain restrictions – that reduces their taxable income.

Credits are subtracted dollar-for-dollar from tax liability thus reducing tax payments. For example, taxpayers are permitted to take a credit for college tuition paid against their PIT liability. Certain credits are refundable which means that if the value of the credit exceeds tax liability, the excess is refunded to the taxpayer.

Tax deferrals result from delayed recognition of income. For example, money placed into certain retirement accounts is not taxed until withdrawn.

Preferential tax rates apply lower tax rates to part or all of a taxpayer's income. For example, some small businesses and certain manufacturing and emerging technology companies pay a 9A Corporation Franchise

Tax rate of 6.5% on their net income rather than the 7.1% paid by most other corporations.

Estimated forgone revenues to NYS resulting from each of its tax expenditures ranges from under a million dollars to more than a billion dollars per year.13 Tax expenditures with an estimated revenue impact of more than a billion dollars in FY2010 include:

The exclusion of interest, dividends and capital gains from Subsidiary Capital on the 9A Corporation Franchise Tax

The interest deduction on the Personal Income Tax

The exemption of certain foods from the Sales/Use Tax.

Comparisons with Other States

States differ with respect to the taxes they impose, their tax structure and rates, and the authority given to local governments to levy their own taxes. Differences among states are significant and contribute to their competitive position for businesses and residents.

Several measures are used to compare taxes among the states; individual state rankings depend on which measure is applied. Table 1 shows how NYS ranks relative to four neighboring states applying the two most commonly used measures: (1) Per Capita State Taxes and (2) State Taxes as a Percent of Personal Income. Both measures are based on data collected and published by the U.S. Bureau of the Census.

Per capita state taxes measures tax collections relative to the size of the population served by government.

State taxes as a percent of personal income relates tax payments to an indicator of state economic performance.

As seen in Table 1, NYS ranks higher, i.e., has a greater tax burden, than its four neighboring states with one exception. Among all 50 states, New York ranks 7th and 15th, indicating that several states have greater tax burdens based on the two measures.

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Table 1:NYS and Four Neighboring States: State Tax Burden Rankings, 2009*

Measure NY NJ PA CT MA Per Capita State Taxes

7 10 22 5 11

State Taxes as % of Personal Income

15 28 29 19 31

*Possible values range from 1 to 50. The lower the ranking, the higher the tax burden. Source: Federation of Tax Administrators based on U.S. Census State and Local Government Finances When local taxes are added, Table 2 shows that NYS does not fare as well. According to the Tax Foundation, a Washington D.C. research organization, NYS has a heavier state/local tax burden than all states with the exception of New Jersey, and a less competitive business tax climate than all other 49 states.14

Table 2: NYS and Four Neighboring States: State/Local Tax Burden Rankings

Measure NY NJ PA CT MA State/Local Tax Burden 2008*

2 1 11 3 23

Business Tax Climate 2011**

50 48 26 47 32

*Possible values range from 1 to 50. The lower the ranking, the greater the tax burden. **A larger number indicates a more unfavorable business tax climate with 50 the lowest possible ranking. Source: The Tax Foundation

Common Issues and Concerns The Guide to New York State Taxes describes the structural elements of each major NYS tax as well as other relevant details about the tax – how it has evolved over time, how much revenue it generates, and how it compares to similar taxes in other states.

Although the taxes differ, several issues and concerns are common among them. They are discussed briefly below and explained more fully in the descriptions of the individual taxes in the Guide. Exhibit 3 shows which of the State’s major taxes are affected by the common issue and concern.

High Taxes. As discussed above, NYS has the least favorable business tax climate of all 50 states and the highest state/local tax burden of all states with the exception of New Jersey. The many taxes levied by NYC and other local governments on top of those imposed by NYS are a major factor contributing to the State’s unfavorable tax burden rankings.

Combined NYS/NYC Taxes. NYS levies many taxes on the same base as NYC. Of the 19 taxes imposed by the City, 11 are also levied by NYS.15 Comparative tax burden studies always show NYC with the highest or close to the highest combined city/state burden in the nation.

The City has the highest combined state/local personal income tax rate and the highest combined state/local corporate income tax rate in the U.S.

The combined NYS/NYC Real Property Transfer Taxes and Mortgage Recording Taxes give NYC the highest real estate closing costs in the U.S.

Taxes on Utilities. Variation among the states in electricity, telecommunications and other utility costs is primarily attributable to state and local taxes. In NYS, taxes imposed on utilities include the State Gross Receipts and 9A Corporation Franchise Taxes, local business income/gross receipts taxes, State/local sales taxes and local property taxes. Surcharges also contribute to high utility costs in NYS.

NYS and local government taxes/fees paid by utilities are passed along to customers in their bills, with few exceptions. For example, for an average residential customer living in NYC, taxes/fees represent almost half of their electricity delivery bill.

NYS ranks second to Hawaii in the price of electricity paid by most consumers; it ranks fourth highest among all states in taxes imposed on mobile telecommunications providers.

Property Taxes. Residential property taxes in many NYS jurisdictions are among the highest in the nation. In 2009, of 10 counties in the U.S. with the highest ratio of median real estate taxes to median home values, 9 were located in NYS: Monroe, Niagara, Wayne, Chemung, Chau-

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tauqua, Erie, Onondaga, Steuben and Madison. Property Taxes as a percent of median home values in these counties ranged from 2.43% to 2.89%; the U.S. average was 1.04%.16

Electronic Commerce. The growth in e-commerce is a new challenge, with rapidly changing communications technologies making geographic borders less relevant for many taxes. The increase in e-commerce sales and the failure of most taxpayers to remit taxes on their purchases has negatively impacted the State’s Sales/Use Tax collections and those of local governments that impose similar taxes. The loss in 2009 of NYS/NYC Sales and Use Tax revenues resulting from untaxed e-commerce sales is estimated at $655 million.17 Cigarette Tax revenues are also adversely affected by Internet sales. The growing use and reliability of telecommunications technology also means that more business can be conducted electronically with physical location no longer a necessity. This, too, has an adverse impact on NYS and NYC tax revenues as businesses act to reduce their tax liabilities through increased use of the Internet and emerging technologies.

Government Regulatory Reforms. Passage of the Federal Gramm-Leach-Bliley Act (GLBA) in 1999 removed the regulatory demarcation between banks, securities firms, and other financial institutions including insurance companies. Currently, banks are taxed under the NYS Bank Tax; other financial services institutions under the 9A Corporation Franchise Tax. NYS is considering a single tax structure for financial institutions. A proposal prepared by the State has been forwarded to members of the industry for review and comment. The recently enacted Federal Dodd-Frank Wall Street Reform and Consumer Protection Act has changed the regulatory environment for financial institutions, reinforcing the importance of restructuring the State’s taxation of banks and other financial institutions.

The Insurance Industry. GLBA confirmed the intent of Congress that insurance companies continue to be regulated by the 50 states. The

Dodd–Frank law, however, is giving the Federal government an increasing role in the industry. It provides for the creation of the first office in the Federal government focused on insurance. One of the functions of the office is to monitor the insurance industry for systematic risk purposes.

Utilities. Many issues pertaining to utility taxation relate to deregulation, particularly of companies supplying electricity, natural gas and telecommunications services. Deregulation has changed the marketplace so that regulated utility companies now compete with other companies in providing electricity, natural gas and telephone services. Deregulation makes the distinction between the taxation of NYS’s 9A Corporation Franchise Taxpayers and Utility Taxpayers difficult to rationalize. Most NYS corporations pay taxes based on net income. Regulated utilites companies are taxed on net income and gross receipts. Transparency. One of the standards of a good tax and a good tax system is that they be transparent to taxpayers. The meaning of the different tax law provisions ought to be straightforward and the mechanics of calculating the tax should not be a mystery. The complexity of several NYS taxes makes them opaque. The 94-page instruction booklet issued to taxpayers with PIT tax forms illustrates the complexity of the State’s major source of tax revenues. The booklet contains instructions for three tax forms, several tables explaining how to calculate tax liability and advice to taxpayers for claiming credits and deductions. Tax Expenditures. The multi-billion dollar revenue impact on NYS of tax expenditures includes refunds to taxpayers by the State for refundable credits.

For refundable credits, if the value of the credit exceeds tax liability, the excess is refunded to the taxpayer. For example, in 2006, the State refunded $208 million to 9A Corporation Franchise Taxpayers of which $41million was for Brownfield Credits.18 Some of these credits were for remediation of Brownfield sites; some for redevelopment

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of the remediated sites. Brownfield credits taken against the PIT are also refundable.

Non-refundable credits are credits that allow the taxpayer to reduce tax liability to zero. The taxpayer is permitted to carry forward many unused non-refundable credits to reduce taxes in future years. For example, in 2006, the unused carry forward component of the Investment Tax Credit (ITC) taken against the 9A Corporation Franchise Tax was $1.3 billion.19

The annual tax expenditure report issued by the State provides information concerning NYS credits and other tax expenditures. No evaluation of the effectiveness of refundable credits or any other tax expenditures is included in the report.

Conclusions NYS imposes a wide variety of taxes on its residents, businesses and visitors. Most of the State’s taxes were enacted more than 50 years ago, long before dramatic technological advances, new economic structures and deregulation changed the environment in which taxes are imposed. The information presented in the Guide can provide a baseline for efforts undertaken to improve and modernize the State’s tax structure.

Endnotes 1The NYS Fiscal Year runs from April 1 to March 31; the NYC Fiscal Year from July 1 to June 30. 2NYS Division of the Budget. 2007 is the latest year for which these data are available. 3The only employers exempt from the tax are agencies/instrumentalities of the U.S., the United Nations, or an interstate agency or public corporation created under an agreement or compact with another state or Canada. Public school districts have their mobility tax payments fully reimbursed by NYS in the fiscal year following payment. 4 The tax does not apply if the individual’s allocated net earnings from self employment are $10,000 or less for the tax year. 5The employer’s payroll expense must be greater than $2,500 in a calendar quarter before the tax applies. 6Economic conditions are measured by the NYS Index of Coincident Economic Indicators developed by the Federal Reserve Bank of New York. The Index combines indicators of economic activity, including employment, to measure overall changes in economic conditions in NYS.

http://www.ny.frb.org/research/regional_ economy/ coincident_nystate.html. 72008 is the latest year for which composite local government tax data are available from the U.S. Census of Government Finances, the only published source for such data. 8Among the taxes levied by NYC are: the General Corporation Tax, Bank Tax, Utilities Tax, Unincorporated Business Tax, Commercial Rent Tax and the Hotel Tax. 9NYS law mandates that property owned by government entities and certain not-for-profit organizations be fully exempt from the RPT. Other properties are partially exempt under various programs. 10NYS Office of the Comptroller (2009 data for fire districts are not available). http://www.osc.state.ny. us/ localgov/datanstat/findata/index_choice.htm. 11Government funds not included here are Proprietary Funds and Fiduciary Funds. 12There has been no NYS intra-year short-term borrowing since FY1994. Currently, any State intra-year short-term borrowing requires a declaration of emergency by the Governor and legislative leaders and must be paid down within four years following such a declaration. 13Estimated FY2010 revenue impacts of all NYS tax expenditures can be found in the 20th NYS Annual Report on Tax Expenditures http://www.budget.state.ny.us/pubs/archive/fy0910archive/eBudget0910/fy0910ter/TaxExpenditure09-10.pdf. 14 Tax Foundation http://www.taxfoundation.org/news/show/335.html and http://www.taxfoundation.org/publications/show/22661.html. 15 The 19 taxes include the tax on Off-Track Betting administered by the NYC Off-Track Betting Corporation (OTB) which was closed as of December 2010. 16Tax Foundation http://www.taxfoundation.org/ taxdata/show/1888.html 17Bruce et al. State and Local Government Sales Tax Revenue Losses from Electronic Commerce. http://cber.bus.utk.edu/ecomm/ecom0409.pdf . 18 2006 latest data available in NYS Annual Report on Tax Expenditures. As a result of tax law provisions enacted in the 2010 NYS budget, participants in the Brownfield Program with cumulative tax credits in excess of $2 million must defer them.The deferral will apply to credits that could otherwise have been claimed in tax years 2010, 2011 and 2012. 19Ibid.

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Exhibit 1: NYS General Fund and All Funds Revenues, FY2010 ($ in Millions) General Fund All Funds1

Revenues

% of Total NYS Taxes

% of Total NYS Revenues

Revenues

% of Total NYS Taxes

% of Total NYS Revenues

Total Revenues $52,556 - - $126,748 - - All Taxes 36,997 100.0 70.4 57,668 100.0 45.5 Personal Income Tax 22,654 61.2 43.1 34,751 60.1 27.4 Sales and Excise Taxes 8,087 21.9 15.4 12,852 22.2 10.1 Sales/Use Tax 7,405 20.0 14.1 10,527 18.2 8.3 Excise Taxes 682 1.8 1.3 2,312 4.0 1.8 Cigarette and Tobacco Products 456 1.2 0.9 1,366 2.4 1.1 Alcoholic Beverage 226 0.6 0.4 226 0.4 0.2 Motor Fuel - - - 507 0.9 0.4 Highway Use - - - 137 0.2 0.1 Auto Rental - - - 76 0.1 0.1 Business Taxes 5,371 14.5 10.2 7,459 12.9 5.9 General Corporation Tax (9A) 2,145 5.8 4.1 2,511 4.3 2.0 Bank Tax 1,173 3.2 2.2 1,399 2.4 1.1 Insurance 1,331 3.6 2.5 1,491 2.6 1.2 Petroleum Business Taxes - - - 1,104 1.9 0.9 Corporation & Utility Taxes 722 2.0 1.4 954 1.7 0.8 Transfer Taxes 866 2.3 1.6 1,359 2.4 1.1 Real Estate Transfer Tax - - - 493 0.9 0.4 Estate and Gift Taxes 866 2.3 1.6 866 1.5 0.7 Other Taxes2 19 * * 1,247 2.2 1.0 Miscellaneous Receipts 3,888 - 7.4 23,557 - 18.6 Federal Grants 71 - 0.1 45,523 - 35.9 Transfers 11,600 - 22.1 - - -

1Includes General Fund, Special Revenue Funds, Debt Service Funds and Capital Projects Funds. 2 Includes the Pari-Mutuel Tax, the Racing Admissions Tax, the Boxing/ Wrestling Exhibitions Tax. Receipts from the Mobility Tax imposed in the Metropolitan Commuter Transportation District are included in All Funds revenues. *Less than 0.1% Source: All Funds Revenues reported as receipts for 2009-2010. NYS Mid-Year Financial Plan Update 2010-11 through 2013-14, November 1, 2010, pp. 46-58.

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Exhibit 2: Dedicated Fund Tax Receipts (Millions of $), 2009-2010

FUND Value Total Tax Receipts: Dedicated Funds* $22,416 Special Revenue Funds 8,805 School Tax Relief Fund (STAR) 3,420 Personal Income Tax 3,420 Dedicated Mass Transportation Trust Fund 655 Petroleum Business Tax 363 Motor Fuel Tax 105 Motor Vehicle Fees 187 MTA Financial Assistance Fund 1,545 MCTD Payroll Tax 1,384 Motor Vehicle Fees 121 Auto Rental Tax 26 Taxicab Surcharge 14 Mass Trans. Operating Assistance Fund 1,796 Corporate Surcharges 926 Corporation Franchise Tax 461 Corporation and Utilities Tax 139 Insurance Tax 133 Bank Tax 193 Other 870 Sales and Use Tax 662 Petroleum Business Tax 135 Corporation and Utilities Tax– Sections 183 & 184 73 HCRA Resources Fund 1,348 Cigarette Tax 898 Syrup Excise Tax 450 Other Special Revenue Funds 41 Motor Vehicle Fees 41 Debt Service Funds 11,563 Revenue Bond Tax Fund 8,806 Personal Income Tax 8,806 Clean Water/Clean Air Fund 256 Real Estate Transfer Tax 256 Local Government Assistance Tax Fund 2,501 Sales and Use Tax 2,501 Capital Projects Funds 2,048 Dedicated Highway and Bridge Trust Funds 1,849 Petroleum Business Taxes 621 Motor Fuel Tax 396 Motor Vehicle Fees 621 Highway Use Tax 140 Transmission Tax 18 Auto Rental Tax 53 Environmental Protection Fund 199 Real Estate Transfer Tax 199

*Total does not include proprietary funds or fiduciary funds. Source: Estimates as reported in 2010-2011 Executive Budget, Economic and Revenue Outlook, p. 384.

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Exhibit 3: Common Issues and Concerns Related to Major NYS Taxes Tax

High Taxes

Electronic Commerce

Regulatory Reforms

Lack of Transparency

NYS Taxing Same

Base as Local Government

Tax Expenditures Personal Income Sales/Use Cigarette Alcoholic Beverage

Motor Fuels Highway Use Auto Rental 9A Corporation Franchise

Utilities Insurance Bank Petroleum Real Property Transfer

Estate Does not include taxes that account for less than 0.1% of NYS tax revenues.

Personal Income Tax

1-‐1

1.0 PERSONAL INCOME TAX 1.1 Overview New York State adopted the Personal Income Tax (PIT) in 1919 under Article 22 of the State Tax Law. In FY 2010, the PIT generated $34.8 billion, accounting for 60.3% of NYS tax revenues and 27.4% of all State revenues. Of the $34.8 billion, 65.3% was deposited in the State General Fund, 9.7% in the School Tax Relief Fund (STAR) and 25.0% in the Revenue Bond Tax Fund (RBTF).1 1.2 The NYS Personal Income Taxpayer The State PIT is imposed on the taxable income of NYS resident or non-resident individuals, estates and trusts.

Non-residents accounted for 10.2% of State PIT tax returns and 15.5% of PIT liability in 2007. 2

Tax payments from high-income filers represent a substantial portion of total PIT revenues. In FY2010, an estimated 33% of PIT liability was attributable to taxpayers with NYS Adjusted Gross Income of $1,000,000 and above and 20% to taxpayers with NYAGI of $200,000 up to $1,000,000. As shown in Table 1.1, of total tax returns, 0.4% and 2.6% were filed by these two groups of taxpayers, respectively.

Table 1.1: NYS Personal Income Taxes, 2010 Percent of Total Income Tax

Liability Tax Returns

NYS AGI

$0-$50,000 4.6% 61.0% 17.5% 50,000-100,000 23.3 26.4 28.5 100,000-200,000 18.6 9.7 18.6 200,000-1,000,000 20.2 2.6 14.7 1,000,000 & above 33.3 0.4 20.7

Note: Percentages may not add to 100% due to rounding. Source: Estimates by NYS Division of the Budget in 2010-2012 Executive Budget, Economic and Revenue Outlook, p. 192.

Taxable Income Sources. Residents are taxed on all sources of income; non-residents are taxed on income attributable to NYS sources. Income sources for residents and non-residents include wages, salaries, divided income and income from business entities in which the taxpayer performs services or holds an interest.

For taxpayers who are sole proprietors, the PIT is imposed on business net earnings.

For taxpayers who are members of a partnership, the PIT is imposed on their distributive share of partnership income. Partnerships, including limited liability companies treated as partnerships, with NYS-source gross income of $1 million or more must pay a filing fee ranging from $25 to $4,500.

Limited Liability Companies are classified and taxed as partnerships for purposes of the New York State PIT unless they elect to be taxed as a corporation.

S Corporation income is passed through to individual shareholders and subject to the PIT.

Filing Status. The State has 5 filing statuses, e.g., married filing jointly with 7 tax brackets for tax years 2009-2011 – 5 brackets are in the permanent tax structure. The two temporary brackets were added at the top end of the income range with the highest rate set at 8.97% on taxable income in excess of $500,000 for all filers (see Exhibit 1.1). The Mobility Tax. Effective 2009, NYS has imposed the Metropolitan Commuter Transportation Mobility Tax, a $0.34/$100 payroll tax on most employers and self-employed individuals doing business in NYC and the other 7 counties in the MCTD: Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk and Westchester. NYS distributes the mobility tax revenues to the MTA.

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For individuals, the tax is imposed on net earnings from self-employment allocated to the MCTD for the tax year.3 Partners – including members of LLCs treated as partnerships for purposes of the Federal Income Tax – are subject to the 0.34% tax on net earnings allocated to the MCTD. For S Corporations, the tax is imposed on the payroll of workers who are employed in the MCTD; distributions to owners/shareholders are not subject to the Mobility Tax.

1.3 The NYS Personal Income Tax Base The NYS Personal Income Tax base is derived from the taxable income of residents and non-residents with State-source income. As shown in Figure 1.1, the starting point for computing NYS Personal Income Tax liability is Federal Adjusted Gross Income (FAGI) as reported on Federal individual income tax returns. FAGI is then adjusted to arrive at NYS Adjusted AGI (NYAGI). Certain income items not taxed by the Federal government are taxed by NYS; these are added back to Federal AGI to calculate NYAGI. Other items subject to Federal taxation are not taxed by NYS; these are subtracted from Federal AGI to calculate NYAGI.

Add-backs to FAGI include state, local and foreign income taxes deducted for Federal income tax purposes, interest on bonds issued by other states and their localities, and certain retirement and flexible benefits paid to NYC and NYS employees. Other add-backs result from NYS decoupling from the Federal tax code, e.g., depreciation allowances. 4

Subtractions from FAGI include interest income on U.S. government bonds, taxable social security payments, all Federal, NYS and local government pension income, qualifying private pension and annuity income up to $20,000. NYS residents are also permitted to subtract their contributions of up to $5,000 ($10,000 for joint filers) per year to the NYS College Choice Tuition Savings Program.

Once NYAGI is determined, taxpayers subtract NYS deductions and exemptions from this value to determine NYS taxable income – the base for calculating NYS tax liability. Deductions. New York State PIT filers may deduct either the NYS-defined standard deduction or State-defined itemized deductions

from their NYAGI. Taxpayers taking the standard deduction for Federal purposes must use the NYS standard deduction in calculating their taxable income for State PIT purposes. The standard deduction is $7,500 for single filers and $15,000 for joint filers.

Deductions for taxpayers who itemize are the same as those allowed for Federal income tax purposes with certain modifications. These include adding back State income taxes which are deductible for Federal but not for State tax purposes. Additional modifications are applied to higher income filers.

For single NYS PIT filers with NYAGI over

$100,000, and for married filers with NYAGI over $200,000, deductions are

Figure 1.1: Calculating NYS Personal Income Tax Liability

Federal Adjusted Gross Income Plus

New York State Add-ons Minus

New York State Subtractions Equals

New York State Adjusted Gross Income Minus

NYS Deductions and Exemptions Equals

New York State Taxable Income Multiplied by

NYS Tax Rates Equals

NYS PIT Liability Before Credits Minus

NYS Tax Credits Equals

NYS PIT Liability

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limited to 75% of their modified Federal itemized deductions.

For all filers with NYAGI greater than $525,000 up to $1 million, deductions are limited to 50% of their modified Federal itemized deductions.

For all filers with NYAGI over $1 million, itemized deductions are limited to 50% percent of the charitable deductions taken on the Federal return.

In Tax Years 2010 to 2012, for all filers with NYAGI over $10 million, itemized deductions are limited to 25% of charitable contributions taken on their Federal return.

Exemptions. An exemption of $1,000 per dependent is provided for purposes of determining State PIT taxable income. Unlike the Federal government, the State does not permit an exemption for the taxpayer or spouse. Tax Liability. As shown in Figure 1.1, State PIT liability is calculated by (1) multiplying NYS taxable income by the appropriate tax rates and (2) subtracting the dollar value of tax credits allowable by NYS, where applicable. Credits reduce tax liability by an amount equal to the value of the credit in contrast to exemptions and deductions which reduce taxable income, i.e. the base upon which tax liability is determined. New York State provides credits to achieve three different policy objectives. They are:

To reduce the tax burden for taxpayers with incomes below a certain level.

To promote certain taxpayer behavior. To encourage economic development/capital

investment. These credits are provided to sole proprietors, partnership members and other business owners who are subject to the PIT rather than one of the NYS business income taxes.

Certain PIT credits are refundable which means that if the value of the credit exceeds tax liability, the excess is refunded to the taxpayer. The values of the most expensive PIT tax expenditures in FY 2010 are shown in Table 1.2. All PIT credits are listed in Exhibit 1.3.

Table 1.2: Highest Value Credits Taken Against NYS Personal Income Tax Liability, Estimated FY2010

Credit

Value in Millions

Percent of FY2010 PIT Revenues

Earned Income Credit

$825 2.3%

Empire State Child Credit

655 1.9

Brownfield* 465 1.3 Child and Dependent Care Credit

300 0.9

College Tuition Credit

224 0.6

Qualified Empire Zone Credits**

170 0.5

*Credit taken by sole proprietors, partners in partnerships, including LLCs and shareholders in State S Corporations **Effective 7/1/10, Empire Zone Credits have been replaced by credits under the NYS Excelsior Jobs Program. Source: Estimates from 20th Annual NYS Tax Expenditure Report, pp. 28-30.

1.4 Trends in NYS Personal Income Tax Revenues The FY2010 revenues pictured in Figure 1.2 were 50% above FY2000 revenues in current dollars. In constant dollars they were 17% above FY2000 but 8% below the FY2008 peak year level.

Figure 1.3 shows that PIT revenues are sensitive to changing economic conditions. The increase in PIT rates to offset declining tax collections prevented even larger revenue fluctuations than those that actually occurred in several years including 2010.

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1.5 History of the NYS Personal Income Tax In 1919, NYS became the 7th state to enact some type of personal income tax. In 1959, the State PIT law was adopted defining NY income according to Federal law. Structural reforms that change the definition of Federal taxable income (e.g., deductions) have a direct impact on the NYS definition of taxable income unless the State makes modifications to its tax. Changes to Federal tax rates, however, do not directly impact the State since its own tax structure is used to calculate NYS tax liability (see Figure 1.1, p. 2). Major legislative changes to the PIT since 1980 are summarized in Exhibit 1.5. 1.6 The Personal Income Tax in NYS Local Jurisdictions NYC and Yonkers are the only local governments in NYS with statutory authority to levy a Personal Income Tax. Both taxes are administered by the NYS Department of Taxation and Finance and reported by taxpayers in a separate section of their State Personal Income Tax returns. New York City. The New York City PIT is imposed on the taxable income of resident individuals, estates, and trusts. No City PIT is imposed on non-residents with the exception of certain employees of the NYC government who are required to pay an amount equivalent to the PIT they would pay if they were City residents.

The combined NYC/NYS top PIT tax rate is the highest in any jurisdiction in the U.S. (see Exhibits 1.1 and 1.2)

Yonkers. Yonkers levies an income tax on residents at a rate of 10% of their NYS tax liability after accounting for non-refundable credits. It imposes an earnings tax on non-residents at a rate of 0.5% of wages/self-employment earnings in Yonkers, after an exclusion of $3,000 that phases out when earnings exceed $30,000. 1.7 The Personal Income Tax in Other States

Forty-one states plus the District of Columbia impose some type of broad-based income tax (see Exhibit 1.4); in two states tax imposed solely on dividends and interest income. Among the 41 states imposing the tax, 15 give all or certain local governments the option to impose a similar tax. Philadelphia is the only local government with a higher tax rate than NYC – but it has a lower combined city/state rate. 1.8 Issues and Concerns High Tax Rates. The two new marginal PIT rates imposed by the State for tax years 2009-2011 bring the combined NYC/NYS top marginal rate to 12.62%. This is the highest combined state/city tax rate imposed in any jurisdiction in the nation and provides an incentive for high income earners living in NYC to relocate especially to nearby states with lower taxes. Tax Expenditures. In FY2010, the total revenue loss to NYS associated with tax expenditures related to the PIT was $10.8 billion.5 The loss resulted from:

exclusions taken by taxpayers in modifying Federal AGI to arrive at NYAGI;

deductions and exemptions subtracted from NYAGI to arrive at NYS taxable income (the base for calculating tax liability); and

subtraction of the dollar value of credits from tax liability to determine the amount of taxes owed to NYS. The estimated value of tax expenditures associated with credits

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against the PIT in FY2010 was $3.0 billion – 8.8% of FY2010 PIT revenues. All PIT credits are listed in Exhibit 1.3.

Many PIT credits are refundable which means that if the value of the credit exceeds tax liability, the excess is refunded to the taxpayer by NYS. In FY2010, the estimated value of refunded credits was $2.8 billion.

Transparency. The 94-page instruction booklet issued to taxpayers with the PIT tax form demonstrates how complicated the tax is. Its complexity results in a lack of transparency, an important indicator of a good tax.6 The booklet contains instructions for three tax forms, several tables to assist the taxpayer in calculating tax liability and instructions for claiming tax credits and deductions. Several components of the PIT contribute to its complexity. These include the many add-backs and subtractions from Federal Adjusted Gross Income to determine NYS Adjusted Gross Income and the close to 40 credits that can be used by taxpayers to reduce tax liability – assuming taxpayers understand their eligibility for them. Special rules that apply to high income taxpayers also contribute to the complexity of the PIT. Special instructions for taxpayers with annual incomes in excess of $100,000 are provided in the PIT instruction booklet. They require most taxpayers in this income bracket to multiply taxable income by a flat tax rate rather than applying the progressive rate structure used by other taxpayers.

Endnotes

1Based on estimates for 2010 published in 2010-11 NYS Executive Budget. Economic and Revenue Outlook, p. 177. http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 2 2007 is the latest year for which these data are available. Generally, non-residents can claim a credit against income tax liability in their home state for NYS taxes paid. 3 The tax does not apply if the individual’s allocated net earnings from self employment are $10,000 or less for the tax year. 4Because the calculation of NYAGI starts with FAGI, modification of FAGI will impact NYAGI. NYS must pass legislation if it does not want the Federal provisions to apply to NYS/NYC tax calculations. This legislative action is referred to as decoupling. 5NYS 20th Annual Report on Tax Expenditures http://publications.budget.state.ny.us/eBudget1011/fy1011ter/TaxExpenditure10-11.pdf p. 29. 6American Institute of Certified Public Accountants Guiding Principles for Tax Law Transparency.

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Exhibit 1.1: NYS Personal Income Tax Rates by Filing Status, Tax Year 2010 New York State Taxable Income Rates Single/Married Filing

Separately Head of Household Filer Married Filing Jointly**

4% $8,000 or less $11,000 or less $16,000 or less 4.5% Over $8,000 to $11,000 Over $11,000 to $15,000 Over $16,000 to $22,000 5.25% Over $11,000 to $13,000 Over $15,000 to $17,000 Over $22,000 to $26,000 5.9% Over $13,000 to $20,000 Over $17,000 to $30,00 Over $26,000 to $40,000 6.85% Over $20,000 to $200,000 Over $30,000 to $250,000 Over $40,000 to $300,000 7.85%* Over $200,000 to $500,000 Over $250,000 to $500,000 Over $300,000 to $500,000 8.97%* Over $500,000 Over $500,000 Over $500,000

*Two top rates are temporary for tax years 2009-2011. ** Same rates apply to qualified surviving spouse filers. Source: New York State Personal Income Tax Return IT150/2010

Exhibit 1.2: NYC Personal Income Tax Rates by Filing Status, Tax Year 2010* New York City Taxable Income Rates Single/Married Filing

Separately Head-of Household-Filer Married Filing Jointly**

2.907% $12,000 or less $14,400 or less $21,600 or less 3.534% Over $12,000 to $25,000 Over $14,400 to $30,000 Over $21,600 to $45,000

3.591% Over $25,000 to $50,000 Over $30,000 to $60,000 Over $45,000 to $90,000 3.648% Over $50,000 Over $60,000 Over $90,000

*Includes 14% additional tax (also referred to as the surcharge). For example, the top 3.648% base rate without the 14% additional tax is 3.2%. **Same rates apply to surviving resident spouse filers. Source: New York State Personal Income Tax Return IT150/2010

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Exhibit 1.3: NYS Personal Income Tax Credits, Estimated FY2010 Value (millions of $)

Tax Credit Category Credit Value Household Credit 93 Earned Income Credit* 825 Reducing Tax Burden on Filers with Certain Income Characteristics

Real Property Tax Credit (Circuit Breaker)* 30

Child and Dependent Care Credit* 300

Empire State Child Credit* 655

Enhanced State Earned Income Tax Credit for Certain Non-Custodial Parents *

3

College Tuition Credit*(includes value for itemized deductions)

224

Rehabilitation of Historic Properties Credit 5 Historical Homeownership Rehabilitation Credit 5 Clean Heating Fuel Credit * 0.3

Encouraging Certain Taxpayer Behavior

Long-term Care Insurance Credit 75

Conservation Easement Credit * 2

Solar Energy System Equipment Credit **

Green Building Credit 0.2

Volunteer Firefighters and Ambulance Workers Credit * 14

Security Training Tax Credit* 0.1 Low-Income Housing Credit 20 Investment Credit 24 Investment Credit for Financial Services Industry 0.4 Qualified Empire Zone Credit* 170 Empire Zone and Zone Equivalent Areas Tax Credit*** 45 Employment of Persons with Disabilities Credit 0.1 Accessible Taxicabs for Individuals with Disabilities

Credit 0.1

Economic Development/Capital Investment Credits

Purchase of an Automated External Defibrillator Credit 0.1

Qualified Emerging Technology Companies Credits (QETC)

QETC Capital Tax Credit 1

QETC Employment Credit* 0.2

QETC Facilities, Operations and Training Credit* 5

Empire State Film Production Credit * 8

Brownfields Tax Credit * 465

Alternative Fuel Credit **

Empire State Commercial Production Credit* 6

Bio-fuel Production Credit * 10

Farmers’ School Property Tax Credit* 30 *Refundable credit **Less than $100,000 in tax expenditures ***Refundable for new businesses only Note: Accumulation Distribution Credit ($0.1million), Nursing Home Assessment Tax Credit ($14 million) and the Special Additional Mortgage Recording Tax Credit ($20 million) not included. Source: 20th Annual Report on New York State Tax Expenditures, New York State Division of the Budget and Department of Taxation and Finance , Table 4.

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Exhibit 1.4: State Personal Income Tax Rates, 2010* State Tax Rate

Range Brackets

Personal Exemptions /Credits

Alabama 2.0-5.0 3 $300/dependent; $1,500/single filer; $3,000/married filer Arizona 2.59-4.54 5 $2,300/dependent;$2,100/single filer; $4,200/ married filer Arkansas 1.0-7.0 6 Tax credit: $23/dependent; $23/single filer; $46/married filer California

1.25-9.55 +1%>$1 mill

6 Tax credit: $98/dependent; $98/single filer; $196 married filer

Colorado 4.63 1 None Connecticut 3.0-6.5 3 Maximum exemption $13,000, decreasing as income increases; phased out at AGI of

$61,000 Delaware 2.2-6.95 6 Tax credits: $110/ dependent; $110/single filer; $220/married filer; Georgia 1.0-6.0 6 $3,000/dependent; $2,700 single filer; $5,400 married filer Hawaii 1.4-11.0 12 $1,040/dependent; $1,040/single filer; $2,080/ married filer Idaho 1.6-7.8 8 $3,650/dependent; $3,650/single filer; $7,300/married filer** Illinois 3.0 1 $2,000/dependent and single filer; $4,000/married filer Indiana 3.4 1 $1,000/dependent; $1,000 /single filer; $2,000 /married filer Iowa 0.36-8.89 9 Tax credits: $40/dependent; $40/single filer; $80/married filer Kansas 3.5-6.45 3 $2,250/dependents; $2,250/single filer; $4,500/married filer Kentucky 2.0-6.0 6 Tax credit: $20/dependent; $20/single filer; $40/married filer Louisiana 2.0-6.0 3 Combined personal exemption and standard deduction: $1,000/dependent; $4,500/

single filer; $9,000 married filer Maine 2.0-8.5 4 $2,850/dependent; $2,850/single filer; $5,700/married filer Maryland 2.0-6.25 8 $2,400/dependent; $2,400/single filer; $4,800/married filer Massachusetts 5.3 1 $1,000/dependent; $4,400/single filer; $8,800/married filer Michigan 4.35 1 $3,300/dependent, $3,300/single filer, $6,600/married filer Minnesota 5.35-7.85 3 $3,650/dependent; $3,650/single filer; $7,300/married filer** Mississippi 3.0-5.0 3 $1,500/dependent; $6,000/single filer; $12,000/married filer Missouri 1.5-6.0 10 $1,200/dependent; $2,100/single filer; $4,200/married filer Montana 1.0-6.9 7 $2,110/dependent; $2,110/single filer, $4,200/married filer Nebraska 2.56-6.84 4 Tax Credit: $118/dependent; $118/single filer; $236/married filer New Hampshire State Income Tax Limited to Dividends and Interest Income New Jersey 1.4-10.75 8 $1,500/dependent; $1,000/single filer; $2,000/married filer New Mexico 1.7-4.9 4 $3,650/dependent; $3,650/single filer; $7,300/married filer** New York 4.0-8.97 7 $1,000 /dependent; no exemption for taxpayer or spouse North Carolina 6.0-7.75 3 $3,650/dependent; $3,650/single filer; $7,300/married filer** North Dakota 1.84-4.86 5 $3,650/dependent; $3,650/single filer; $7,300/married filer** Ohio 0.618-6.24 9 $1,550/dependent; $1,550/single filer; $3,100/married filer Oklahoma 0.5-5.5 7 $1,000/dependents; $1,000/single filer; $2,000/married filer Oregon 5.0-11.0 5 Tax credit: $176/dependent; $176/single filer; $352/married filer Pennsylvania 3.07 1 None Rhode Island 3.8-9.9 5 $3,650/dependent, $3,650/single filer, $7,300/married filer** South Carolina 0.0-7.0 6 $3,650/dependent; $3,650/single filer; $7,300 married filer** Tennessee State Income Tax Limited to Dividends and Interest Income Utah 5.0 1 Tax credit: 75% of Federal personal exemption amounts phased out above $12,000 in

income ($24,000 for joint returns) Vermont 3.55-8.95 5 $3,650/dependent; $3,650/single filer; $7,300/married filer** Virginia 2.0-5.75 4 $930/dependent; $930/single filer; $1,860/married filer West Virginia 3.0-6.5 5 $2,000/dependent; $2,000/single filer; $4,000/ married filer Wisconsin 4.6-7.75 5 $700/dependent; $700/single filer; $1,400/married filer Dist. of Columbia 4.0-8.5 3 $1,675/dependent; $1,675/single filer; $3,350/married filer Note: No PIT imposed in Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. *Rates as of 1/1/2010. Rates do not include local government taxes. **Exemptions as provided for Federal income tax purposes. Source: Federation of Tax Administrators, State Individual Income Taxes.

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Exhibit 1.5: Major NYS Legislative Actions Affecting the NYS Personal Income Tax, 1980-2010

Year Action 1981 Commission on Modernization and Simplification of the Tax Law (also known as the Legislative Tax Study

Commission) created to suggest strategies for reforming the State Tax Law. 1985 Three-year tax reduction plan enacted which reduced PIT liability for all income groups, especially low and

middle income taxpayers. 1987 NYS Tax Reform and Reduction Act passed in response to Federal Tax Reform Act of 1986 (TRA). TRA

decreased rates and broadened the federal income tax base by limiting certain exclusions and by repealing certain itemized deductions and tax preferences. The NYS reform known as TRRARA contained provisions to phase in a reduction in the number of basic tax rates from 12 in 1986 to 5 by 1989 and removed a large number of low-income taxpayers from the tax rolls by increasing the State’s standard deduction.

1990 1990 rates and standard deduction frozen at 1989 levels. Rates and standard deduction amounts were frozen again in 1992, 1993, 1994, extending full phase in until 1997.

1991 Supplemental tax enacted to recapture the benefit of the State’s graduated income tax rates for taxpayers with NYAGI in excess of $100,000.

1993 Limited Liability Companies (LLCs) established to be taxed under PIT.

1995 Phased-in reduction of the top tax rate from 7.875% in 1994 to 6.85% in 1997. Changed from a five-bracket structure in 1994 to a four-bracket structure in 1995, then back to five in 1996 and later. Income level of top bracket increased from $26,000 in 1994 to $40,000 in 1997 for married, filing jointly. Excess Deductions Credit enacted for TY 1995 to offset potential tax increases for low and middle income taxpayers.

1997 School Tax Relief (STAR) Program created to provide Property Tax relief financed by PIT receipts

2002 Tax amnesty program adopted for one year.

2003 Two new tax brackets added for 2003, 2004, and 2005 applicable to high-income taxpayers. Temporarily increased LLC fees for 2003 and 2004.

2007 Required certain Federal S corporations to become New York S corporations.

2008 Restructured and reformed fees and minimum tax imposed on LLCs and S and C corporations.

2009 Enacted three-year surcharge on high income taxpayers. Extended PIT to cover sale of partnership interest by non-residents when 50% or more of partnership’s real property is located in NYS. Limited itemized deduction for taxpayers with incomes over $1 million. Repealed certain components of the STAR rebate program. Imposed fees on non-LLC partnerships with NY-source income at above $1 million at same rates applicable to LLCs.

2010

Further limited use of itemized deduction by taxpayers with NYAGI over $10 million to 25% of charitable contributions on the Federal tax return for tax years 2010-2012.

Note: Exhibit 1.5 does not include changes to PIT deductions, exemptions or most credits. Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget, Economic and Revenue Outlook.

Sales/Use Tax

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2.0 SALES/USE TAX

2.1 Overview

New York State adopted the State-wide Sales and Compensating Use Tax in 1965 under Article 28 of the State Tax Law. The Sales Tax is imposed on the sale of most commodities purchased in NYS and on enumerated services provided in the State. The Compensating Use Tax (Use Tax) is imposed on purchases made outside of the State and brought into it for use. In FY2010, the NYS Sales/Use Tax yielded $10.5 billion including the $0.6 billion in revenues from the 0.375% tax imposed in the Metropolitan Commuter Transportation District (MCTD). The $10.5 billion accounted for 18% of NYS tax revenues and 8% of total State revenues. Of the total $10.5 billion in Sales/Use Tax revenues, 70.3% was deposited in the NYS General Fund, 6.2% in the State’s Mass Transportation Operating Assistance Fund and 23.4% in the Local Government Assistance Tax Fund (LGATF).1 LGATF receipts in excess of debt service requirements on Local Government Assistance Corporation bonds are transferred to the General Fund.2

2.2 The NYS Sales/Use Taxpayer Sales by the retail trade sector are the primary source of NYS Sales/Use Tax revenues, accounting for 44% of all taxable sales in 2007-2008. This was more than twice the 21% generated by the services sector (including food and accommodations), the second largest source, and four times the 10% attributable to the wholesale trade sector, the third largest source. 3 Vendors generally act as the tax collectors for the State but for some purchases the individual consumer may be liable for the tax. The responsibility for Sales/Use Tax collections depends on the venue in which the purchase is made.

When a taxable purchase is made in-person in NYS, the Sales Tax is collected by the vendor who is required to remit the taxes collected on the sale to the State. When the purchase of a taxable commodity is made remotely – by mail, over the phone, from a catalog, or on-line – and the tax is not collected by the vendor, the customer is liable for remitting the Use Tax to NYS.4

When a purchase is made outside of the State and shipped to a NYS address, the vendor is responsible for collecting the Use Tax if it has nexus to the State. If the vendor does not have nexus, the customer is responsible for paying the Use Tax to NYS.

When a taxable purchase is made outside NYS and the out-of-state Sales Tax rate is less than the tax rate in NYS, a Use Tax on the difference between the two rates must be paid by the customer.

Nexus. The term nexus in tax law describes a situation in which a business has presence in a jurisdiction and is thus required to collect taxes for sales within that jurisdiction. In NYS and elsewhere in the U.S., the determination of nexus is based on two U.S. Supreme Court decisions: National Bellas Hess v. Department of Revenue in 1967 and Quill v. North Dakota in 1992.5

The Court ruled in Bellas Hess and reaffirmed in Quill that a vendor is exempt from collecting the Sales/Use tax in a jurisdiction in which it does not have an identifiable physical presence. In both cases, the Court acted on its interpretation of the potential adverse impact on interstate commerce if vendors were required to know the rates and range of taxable items in every taxing jurisdiction. Although both Bellas Hess and Quill dealt with catalog mail orders, the Court’s decisions have been extended to apply to e-commerce sales.

The rapid growth of e-commerce sales has increased the complexity and the importance of defining nexus. NYS and local government losses of Sales/Use Tax revenues in FY 2010

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related to untaxed e-commerce sales is estimated at $655 million.6

State Actions to Address the Nexus Issue. In Quill, the Court acknowledged the power of Congress to overturn its decision. In the absence of any congressional action, the states have tried to reconcile differences in their Sales/Use tax – the problem identified in the Quill decision – primarily through the Streamlined Sales Tax Project (SSTP). The project, organized in 2000 by representatives from state legislatures, local governments, and the private sector, has been an attempt to minimize differences among state sales taxes.

In 2002, the SSTP group approved the Uniform Sales and Use Tax Administration Act, known as the Streamlined Sales Tax and Use Agreement (SSUTA). The Agreement combines uniform administration procedures with simplification measures, but does not mandate any actions by the states. By signing onto the SSUTA, states agree to revise their Sales Tax process and to make changes to their tax laws, rules and regulations. Currently 20 states are full members in compliance with the SSUTA; 3 are associate members.7 Although NYS was party to development of the SSUTA, it has not become a signatory to it. To do so, the State would have to make extensive revisions to its Sales Tax law including changing its exemptions for telecommunication services, clothing, drugs and medical equipment.

Addressing Nexus in NYS. In 2008, NYS amended its Sales/Use Tax Law to address the issue of physical presence and nexus particularly as it relates to certain Internet vendors. The amendment expands the State’s definition of nexus to include companies that have no physical presence other than in-State affiliates.

Referred to as the Amazon Law, the State’s amendment is directed at Internet vendors using affiliates to promote in-state sales. These affiliates, or independent in-state website owners, place a link to the Internet vendor on their own websites and earn a commission on

sales made from referrals. Amazon.com chal- lenged the amendment in the NYS Supreme Court arguing that its affiliates are independent contractors who are advertisers, and that Amazon.com does not have nexus in New York.

The Court granted the State’s motion to dismiss Amazon’s suit agreeing that New York-based associates are solicitors, thus giving Amazon.com nexus in New York. Amazon.com is therefore required to collect the NYS Sales/Use Tax and whatever local taxes are applicable.

Amazon.com appealed the decision to the Appellate Division of the NYS Supreme Court. In November 2010, the Court held that the NYS Amazon law is facially constitutional but remanded the case back to the lower court to determine whether the law can be constitutionally applied. In December 2010, Amazon filed to appeal the appellate court ruling.

2.3 The NYS Sales/Use Tax Base

The NYS Sales/Use Tax base consists of most tangible personal property purchased in NYS and certain services enumerated in the State Tax Law. Sales of property and services for resale as such are not subject to the tax. The Sales/Use Tax rate is 4%. An additional 0.375% tax is levied by the State on sales in NYC and the other 7 counties that comprise the MCTD.

Tax Exemptions. The tax base is reduced by exemptions for (1) certain items of tangible personal property, (2) certain business expenditures and (3) purchases by certain entities.

Tangible Personal Property. Tangible personal property exempt from the NYS Sales/Use tax is specifically identified in NYS tax law. Major exemptions include:

Most food for at-home consumption, except for certain items such as soft drinks, candy and alcoholic beverages;

Prescription drugs;

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Newspapers and periodicals; Textbooks for college students; Tangible personal property sold to

someone other than an exempt organization by a contractor adding to or improving real property by a capital improvement.

Clothing and footwear items priced at $110 or less were exempt through September 2010. The exemption, suspended from October 2010 through March 2011, will be reinstated at $55/ item from April 2011 through March 2012 and at the $110 level effective April 1, 2012.8

Exempt Entities. Two types of entities are exempt from the NYS Sales/Use Tax: (1) those that are required to apply for an Exempt Organization Certificate from NYS and (2) those that are not required to file for the Certificate.

Entities required to apply for the Certificate include not-for-profit religious, charitable, educational and certain other organizations, the UN and other international organizations and U.S. armed forces posts. The Certificate can be used to make exempt purchases on behalf of the approved organization.

Organizations not required to apply for the Certificate include: NYS and its political subdivisions, U.S. governmental entities, and organizations that operate under some other NYS or U.S. federal statute which exempts them from state and/or local taxes.

Business Expenditures. Certain business expenditures are exempt from the NYS Sales/Use Tax to prevent tax pyramiding that occurs when taxes are applied several times from production to final sale. The business exemptions are:

Purchases by retailers from manufacturers or wholesalers for items that will be resold

Purchases by manufacturers of machinery and equipment to be used or consumed in the production of tangible personal property for sale.

Table 2.1 lists the NYS Sales Tax exemptions with an estimated revenue impact of $100 million or more in FY2010.

Taxing Services. The NYS Sales/Use Tax applies to the purchases of most goods with enumerated exemptions. In contrast, services to be taxed are specifically enumerated. They are:

Sales of utility/telecommunication services; Information services; Protective/detective services; Maintenance, installation, service and repair

of tangible personal property; Maintenance/service/repair of real property; Storage; Food/beverages sold by restaurants/caterers; Admission charges to places of amusement; Receipts from sales related to the service of

parking/garaging/storing motor vehicles Interior decorating and design; Fabricating/processing/imprinting tangible

personal property; Transportation services; Charges of a roof garden/cabaret; Sales of entertainment and/or information

provided over 800 or 900 phone numbers; Hotel occupancy; Social and athletic club dues.

Table 2.1: NYS Sales Tax Exemptions with Largest Revenue Impact, Estimated FY2010 (millions of $) Exemption Value

Food Products* 1,162 Drugs, Medicine and Medical Supplies 951 Residential Energy 708

Installation Services on Capital Improvements 569

Cable Television Services 307

Interstate or International Telephone Service 265

Fuel Gas and Electricity used in R&D and Production

261

Machinery and Equipment used in Production 251 Precious Metal Bullion and Coins 185

Automotive Fuel Receipts Exceeding $2/gallon

177

Food Sold in School Cafeterias* 131

Eyeglasses, Hearing Aids, and Prosthetic Aids 119

Food Purchased with Food Stamps* 110 *Sales of food items otherwise taxable. Source: Estimates from the NYS 20th Annual Tax Expenditure Report, pp. 148-153

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In addition to the services taxed by NYS, some local governments impose the Sales/Use Tax on services not taxed by the State. For example, NYC imposes its Sales Tax on:

Beautician services, barbering, and hair restoring; tanning; manicure and pedicure; electrolysis;

Massage services and services provided by weight control and health salons, gymnasiums, Turkish and sauna baths, and similar establishments; and

Written or oral credit rating services; and oral credit reporting services not delivered by telephone.

2.4 Trends in NYS Sales/Use Tax Revenues

The FY2010 revenues pictured in Figure 2.1 increased 20.6% over FY2000 in current dollars. In constant dollars, revenues were 6.2% below their FY2000 level and 17.5% below the peak reached in 2005.

Figure 2.2 shows that Sales/Use Tax revenues are economically sensitive meaning that tax revenues generally rise and fall with changing economic conditions. Tax base changes, the introduction or elimination of tax exemptions and collections from audits also impact revenue trends.

2.5 History of the NYS Sales/Use Tax

NYS adopted its Sales/Compensating Use Tax in 1965. Prior to that time, the tax was imposed by NYC and 12 other local governments in the State. The NYS tax was structured along the same lines as the NYC tax where the base was primarily tangible personal property. This emphasis remains until the present time. Major legislative changes to the State Sales/Use Tax are presented in Exhibit 2.4.

2.6 The Sales/Use Tax in NYS Local Jurisdictions NYS law authorizes all 62 counties in the State to levy their own Sales/Use Tax – in addition to the State Tax – in one-half percent increments up to 3%. All counties in the State impose the tax. By special State legislation, all but 6 are also permitted to levy an additional tax at rates ranging from 0.125% to 1.75%.9 Currently NYC and 10 counties have a combined state/local tax rate above 8% (see Exhibit 2.1). The Sales Tax has replaced the Property Tax as the primary revenue source for many NYS counties.10 Cities. NYS law permits certain cities to impose their own Sales/Use Tax at rates up to 3% in addition to the State and county taxes (see Exhibit 2.1). Some cities, including NYC, have legislative authority to impose higher rates. School districts in cities with fewer than 125,000 residents are permitted to impose a Sales Tax of up to 3% on utility services.

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When both a county and a city within the county impose the Sales Tax, the city may pre-empt part of the county’s regular tax and, in some cases, part of its additional tax. If a city pre-empts a portion of its county Sales/Use Tax, NYS law requires that the county share the same percentage of Sales Tax revenues with all other municipalities in the county.

2.7 The Sales/Use Tax in Other States

New York is one of 45 states plus the District of Columbia to impose a Sales/Use Tax (see Exhibit 2.2). Exemptions to the Sales/Use Tax in NYS are similar to those in other taxing jurisdictions. Thirty six states, including New York, permit local governments to levy additional tax. The 10.25% combined state/local rate in Chicago is the highest combined rate in the U.S. (see Exhibit 2.3).

2.8 Issues and Concerns

Use Tax. The NYS Use Tax is collected from individuals and reported on its own line on the NYS Personal Income Tax form. NYS also provides a table based on income to assist taxpayers in determining their Use Tax liability. Most individuals, however, fail to pay the Use Tax causing NYS to lose significant amounts of revenue annually. This is a problem faced by all other states.

E-commerce. The increase in e-commerce sales and the failure of most taxpayers to remit taxes on their purchases has negatively impacted the State’s Sales/Use Tax collections and those of local governments that impose similar taxes. The loss in 2009 of NYS/NYC Sales and Use Tax revenues resulting from untaxed e-commerce sales is estimated at $655 million.11

Tax Expenditures. A Sales Tax transaction can be exempt from the tax because the good/service is exempt or because its use, purchaser, or seller is exempt. There are currently 145 provisions in NYS Tax Law that have been identified as tax expenditures related to the Sales/Use Tax. In FY2010, they reduced State Tax revenues by an

estimated $9.9 billion – an amount almost equal to the $10.5 billion total Sales/Use Tax collections for the year.12 Taxing Services. NYS taxes few of the 168 services identified by the Federation of Tax Administrators (FTA) as potentially taxable.13

The taxation of additional services would broaden the NYS tax base thus generating additional tax revenues. Taxing certain services such as those of medical doctors, however, would make the tax more regressive meaning that it would take a greater percentage of income from lower income taxpayers than higher income taxpayers. Taxing certain other services would raise questions relating to the fairness of the tax. For example, the services of accountants and lawyers working within a company would not be taxed; these same services supplied externally would be taxed.

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Endnotes 1 Based on estimates published in 2010-11 NYS Executive Budget Economic and Revenue Outlook, p.245. http://publications.budget.state.ny.us/ eBudget1011/economicRevenueOutlook/economicRevenueOutlook.pdf 2For FY 2010, $2.3 billion of the $2.6 billion LGATF deposits was to be transferred back to the General Fund. 3 Economic and Revenue Outlook, p. 255. 4Not all Use Tax derives from sales transactions. Some transactions internal to a company can be subject to the Use Tax. 5National Bellas Hess v. Department of Revenue (386 U.S. 753) (1967); Quill v. North Dakota (504 U.S. 298) (1992). 6 Bruce et. al. State and Local Government Sales Tax Revenue Losses from Electronic Commerce http://cber.bus.utk.edu/ecomm/ecom0409.pdf 7Full member states are: Arkansas, Indiana, Iowa, Kansas, Kentucky, Michigan, Minnesota, Nebraska, Nevada, N.J., North Carolina, North and South Dakota, Oklahoma, Rhode Island, Vermont, Washington, West Virginia, Wisconsin and Wyoming. 8 Counties/cities with a Sales Tax exempting clothing/ footwear priced at $110 or below may continue to provide the exemption. Effective March 1, 2011, they may repeal it or provide it on items priced below $55. 9Counties must obtain NYS legislative reauthoriza- tion to impose the additional tax. 10Local government snapshot July 2010 NY Office of the Comptroller 11Bruce et al. State and Local Government Sales Tax Revenue Losses from Electronic Commerce. at http://cber.bus.utk.edu/ecomm/ecom0409.pdf 12 NYS 20th Annual Report on Tax Expenditures http://publications.budget.state.ny.us/eBudget1011/fy1011ter/TaxExpenditure10-11.pdf, p. 19. 13http://www.taxadmin.org/fta/pub/services/tan0505_ services.pdf

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Exhibit 2.1: Combined State/Local/ Sales Tax Rates in NYS Counties and Cities 2010 County Onondaga County 8.000 Albany County 8.000% Ontario County 7.500% Allegany County 8.500 Orange County* 8.125 Broome County 8.000 Orleans County 8.000 Cattaraugus County 8.000 Oswego County 8.000 Olean 8.000 Oswego 8.000 Salamanca 8.000 Otsego County 8.000 Cayuga County 8.000 Putnam County* 8.375 Auburn 8.000 Rensselaer County 8.000 Chautauqua County 7.750 Rockland County* 8.375 Chemung County 8.000 St. Lawrence County 7.000 Chenango County 8.000 Saratoga County 7.000 Norwich 8.000 Saratoga Springs 7.000 Clinton County 8.000 Schenectady County 8.000 Columbia County 8.000 Schoharie County 8.000 Cortland County 8.000 Schuyler County 8.000 Delaware County 8.000 Seneca County 8.000 Dutchess County* 8.125 Steuben County 8.000 Erie County 8.750 Corning 8.000 Essex County 7.750 Hornell 8.000 Franklin County 8.000 Suffolk County* 8.625 Fulton County 8.000 Sullivan County 8.000 Gloversville 8.000 Tioga County 8.000 Johnstown 8.000 Tompkins County 8.000 Genesee County 8.000 Ithaca 8.000 Greene County 8.000 Ulster County 8.000 Hamilton County 7.000 Warren County 7.000 Herkimer County 8.250 Glens Falls 7.000 Jefferson County 7.750 Washington County 7.000 Lewis County 7.750 Wayne County 8.000 Livingston County 8.000 Westchester County* 7.375 Madison County 8.000 Mount Vernon* 8.375 Oneida 8.000 New Rochelle* 8.375 Monroe County 8.000 White Plains* 8.375 Montgomery County 8.000 Yonkers* 8.375 Nassau County* 8.650 Wyoming County 8.000 New York City* 8.875 Yates County 8.000 Niagara County 8.000 Oneida County 8.750 Rome 8.750 Utica 8.750

*Includes the 0.375% imposed by the State on sales in NYC and the other 7 counties and their municipalities that comprise the Metropolitan Commuter Transportation District (MCTD). Source: NYS Department of Taxation and Finance, New York State and Local Quarterly Sales and Use Tax Return September 1-November 30, 2010.

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Exhibit 2.2: State Sales Tax Rates and Selected Exemptions, 2010

Exemptions Drugs State Tax Rate

Prescription Non- Prescription Food

Alabama 4% * Arizona 5.6 * * Arkansas 6 * 2%; Local tax applies California 8.25 * * Colorado 2.9 * * Connecticut 6 * * * Florida 6 * * * Georgia 4 * Local tax applies Hawaii 4 * Low income rebate Idaho 6 * Low income rebate Illinois 6.25 1% 1% 1 Indiana 7 * * Iowa 6 * * Kansas 5.3 * Low income rebate Kentucky 6 * * Louisiana 4 * Local tax applies Maine 5 * * Maryland 6 * * * Massachusetts 6.25 * * Michigan 6 * * Minnesota 6.875 * * * Mississippi 7 * Missouri 4.225 * 1.23 Nebraska 5.5 * * Nevada 6.85 * * New Jersey 7 * * * New Mexico 5 * *; New York 4 * * * North Carolina 5.75 * Local tax applies North Dakota 5 * * Ohio 5.5 * * Oklahoma 4.5 * Low income rebate Pennsylvania 6 * * * Rhode Island 7 * * * South Carolina 6 * * South Dakota 4 * Low income rebate Tennessee 7 * 5.5% Texas 6.25 * * * Utah 4.7 * 1.75%; Local tax applies Vermont 6 * * * Virginia 5 * * 2.5% Washington 6.5 * * West Virginia 6 * 3% Wyoming 4 * Low income rebate Wisconsin 5 * * Dist. of Columbia 6

Note: State Sales Tax not imposed in Alaska, Delaware, Montana, New Hampshire and Oregon; local taxes may apply. *Exempt from tax. Rates do not include local government taxes. Source: Federation of Tax Administrators, February 2010.

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Exhibit 2.3: Sales Tax Rates, New York City and Other Large U.S. Cities, 2009

City City Tax State Tax Other Sales Taxes Total Sales Tax New York City 4.50% 4.00% 0.375%** 8.875% Los Angeles 1.50 8.25 9.75 Chicago 1.25 6.25 2.75 ** 10.25 Houston 1.00 6.25 1.0 ** 8.25 Phoenix 2.00 6.30 ** 0.7** 9.00 Philadelphia* 2.00 6.00 8.00 Detroit - 6.00 6.00 Baltimore 6.00 6.00 Boston 6.25 6.25 Denver* 3.62 2.90 6.52 Atlanta 1.00 4.00 3.00 8.00 San Diego 8.25** 0.50 8.75 San Jose 8.25** 1.00 9.25

* City coterminous with county. **Includes tax for public transportation in area. Sources: Compiled by author from city websites.

Exhibit 2.4: Major NYS Legislative Actions Affecting the NYS Sales /Use Tax , 1980-2010

Year Action

1981 Imposed Metropolitan Commuter Transportation District Sales Tax at 0.25%. 1989 Required out-of-state businesses delivering items into NYS to collect Sales Tax. 1996 Temporarily exempted clothing/footwear under $500 for one week. 1997 Exempted clothing, excluding footwear, costing $100 or less from NYS Sales Tax and from the MCTD Sales Tax

during certain one-week periods in 1998. Permanently exempted tax on clothing under $100. 1998 Added footwear to special tax exemption and raised exemption to $500 from $100. Expanded the permanent sales

tax exemption for clothing/footwear from $100 to $110. 1999 Added two additional Sales Tax- free weeks for clothing items costing less than $500. 2000 Repealed Sales Tax on separately purchased electricity and gas. Enhanced tax exemption for property/services used

to provide telecommunications, Internet access and digital cable television services. Exempted certain equipment/services used by radio and TV broadcasters.

2003 Increased the Sales/Use Tax rate from 4% to 4.25% through May 31, 2005.Suspended exemption for clothing/ footwear priced under $110 from June 2003 through May 2004 and provided for two week temporary exemptions for such clothing/footwear. Included a line on the State PIT return to enable taxpayers to report unpaid Sales/Use taxes. Required that regulations be promulgated to implement tax collections on sales made to non-native Americans on recognized reservations in the State. Added cigarette excise tax to the sales price used to compute NYS and local Sales Taxes on sales of cigarettes.

2004 Required contractors, subcontractors and their affiliates who make deliveries of taxable services or tangible personal property valued at more than $300,000 to New York locations to register as Sales Tax vendors effective on or after January 1, 2005.

2005 Suspended year-round tax exemption for clothing/footwear under $110 through March 2006 and provided for two week Sales Tax exemption periods. Increased the Sales/Use Tax in the MCTD from 0.25% to 0.375%.

2006 Permanently exempted clothing and footwear priced under $110. Capped Sales Tax on motor fuels at $0.08/gallon. 2008 Required nonprofit charitable, educational, religious and other organizations to collect Sales Tax on retail sales of

certain property and services. Created Sales Tax nexus legislation for an evidentiary presumption that certain sellers using New York residents to solicit sales in the State are vendors required to collect tax (Amazon Law).

2009 Expanded the definition of vendor to preclude certain retailers from avoiding the tax. 2010 Eliminated exemption for clothing/footwear under $110 from October -March 2011; provided exemption for

clothing under $55 from April 2011-March, 2012. Provided for reinstatement of exemption effective April 2012, for clothing priced under $110. Imposed Sales Tax on charges by hotel room remarketers.

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Note: Exhibit does not include legislation related to most Sales Tax exemptions. Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget, Economic and Revenue Outlook.

Cigarette/Tobacco Products Tax

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3.0 CIGARETTE/TOBACCO PRODUCTS TAX 3.1 Overview New York State imposed an emergency excise tax on cigarettes in 1939 that was made permanent in 1947 under Article 20 of the State Tax Law. The tax was extended in 1989 to cover other tobacco products such as cigars and pipe/ chewing tobacco, but is still generally referred to as the Cigarette Tax. In FY 2010, the NYS Cigarette Tax generated $1.4 billion, accounting for 2.4% of State tax revenues and 1.1% of all revenues. Of the $1.4 billion, 29.4% was deposited in the State General Fund and 70.6% in the Tobacco Control and Insurance Initiatives Pool.1 3.2 The NYS Cigarette Taxpayer The NYS Cigarette Tax is imposed on licensed agents who bring cigarettes and other tobacco products into the State for sale or use in the State. As proof of payment, authorized agents must purchase NYS tax stamps and affix them to individual cigarette packs before they can be sold at wholesale or retail. If the cigarettes are to be sold in NYC, a joint NYC/NYS tax stamp must be affixed to each pack. Color-coded tax stamps on the cigarette pack indicate that the NYS and NYC Cigarette Taxes have been paid. The tax on other tobacco products is paid by distributors including those who import, manufacture or possess them for sale in NYS. The tax is passed along and included in the price of the cigarettes/other tobacco products paid by the final consumer. 3.3 The NYS Cigarette Tax Base The NYS tax on cigarettes/little cigars is $4.35/pack, on snuff $2/ounce and on other tobacco products 75% of the wholesale price.

The NYS $4.35/pack rate is the highest imposed in any State. The average state tax is $1.45/pack (see Exhibit 3.1).

Cigarette Tax revenues are reduced by exemptions for some purchases. They are:

Cigarettes sold to Federal, State, or local government entities, the UN, and certain diplomatic personnel and not for resale

Cigarettes sold to or by a voluntary unincorporated organization of the armed forces operating a place for the sale of goods

Two cartons of cigarettes or less used in the State if the user brings the cigarettes into the State for use and not for resale

Cigarettes possessed by an agent or wholesale dealer for sale to an out-of-State dealer, or for sale and shipment to a person in another state for use there.

3.4 Trends in NYS Cigarette Tax Revenues In current dollars, FY2010 Cigarette Tax revenues pictured in Figure 3.1 more than doubled over FY2000. In constant dollars, revenues increased by 58% over the decade, reflecting several increases in tax rates (see Exhibit 3.3).

Cigarette Tax revenues are insensitive to changing economic conditions. The general downward revenue trend shown in Figure 3.2

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between the years when tax rates increased reflects the overall decline in smoking.

3.5 History of the NYS Cigarette Tax

The Cigarette Tax was imposed as a temporary measure in 1939 and made permanent in 1947. The legislative changes made to the tax rate and base since 1980 are summarized in Exhibit 3.2.

3.6 The Cigarette Tax in NYS Local Jurisdictions NYC is the one local jurisdiction with NYS statutory authority to levy its own tax on cigarettes The NYC tax rate is $1.50/pack of 20 cigarettes. The combined 8.875% NYS/MCTD/ NYC Sales Tax is imposed on the total price of the cigarettes that includes NYS and NYC Cigarette Taxes plus the Federal Excise tax of $1.01/pack.

The NYS/NYC combined $5.85/pack Cigarette Tax is the highest imposed in any U.S. jurisdiction. In Pennsylvania, the tax is $1.60/pack; in New Jersey it is $2.70.

3.7 The Cigarette Tax in Other States All states plus the District of Columbia tax cigarettes (see Exhibit 3.1). Most local governments in the U.S. do not have state legislative authority to do so.

3.8 Issues and Concerns Bootlegging. Tax evasion resulting from transporting cigarettes from low-tax states for sale in high-tax states – referred to as bootlegging or buttlegging – has long been a problem for tax administrators throughout the U.S. Increasing cigarette prices in New York provide a strong incentive for bootlegging. Sales on Indian Reservations. Almost two decades ago, the U.S. Supreme Court affirmed the right of the states to collect taxes on sales made on Indian reservations to persons who are not members of the Indian nation. The recent decision by NYS to collect these taxes has not yet been implemented. In late 2010, a Federal judge in Buffalo denied a request to block NYS from collecting the tax but froze his decision to allow the tribes requesting the decision to appeal it. Compliance by Internet Vendors. A 2000 NYS law banned direct sales of cigarettes over the Internet, telephone or mail. After winning a lengthy court battle, the State began enforcing the law in June 2003. Federal legislation adopted in March 2010 prohibits the mailing of cigarettes through the U.S. Postal Service. While it would thus appear that cigarettes cannot be sold over the Internet for delivery to NYS consumers, ongoing surveillance is needed to ensure compliance.

One Internet site still advertises that because the vendor processes and ships orders from outside of the U.S., it does not have to report tax/customer information to any government agency or other entity.2

Endnotes

1Based on estimates for 2010 published in 2010-11 NYS Executive Budget. Economic and Revenue Outlook, p. 215. http://publications.budget. state.ny.us/eBudget1011/economicRevenueOutlook/economicRevenueOutlook.pdf 2 http://www.cigoutlet.net

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Exhibit 3.1: State Cigarette Excise Tax Rates, 2010* State Tax/Pack State Tax/Pack State Tax/ Pack

Alabama $0.43 Maine $2.00 Oregon $1.18 Alaska 2.00 Maryland 2.00 Pennsylvania 1.60 Arizona 2.00 Massachusetts 2.51 Rhode Island 3.46 Arkansas 1.15 Michigan 2.00 South Carolina 0.57 California 0.87 Minnesota 1.58 South Dakota 1.53 Colorado 0.84 Mississippi 0.68 Tennessee 0.62 Connecticut 3.00 Missouri 0.17 Texas 1.41 Delaware 1.60 Montana 1.70 Utah 1.70 Florida 1.34 Nebraska 0.64 Vermont 2.24 Georgia 0.37 Nevada 0.80 Virginia 0.30 Hawaii 3.00 New Hampshire 1.78 Washington 3.03 Idaho 0.57 New Jersey 2.70 West Virginia 0.55 Illinois 0.98 New Mexico 1.66 Wisconsin 2.52 Indiana 1.00 New York 4.35 Wyoming 0.60 Iowa 1.36 North Carolina 0.45 Dist. of Columbia 2.50 Kansas 0.79 North Dakota 0.44 Kentucky 0.60 Ohio 1.25 Louisiana 0.36 Oklahoma 1.03

*Rates do not include local government taxes Source: Campaign for Tobacco-Free Kids, August 3, 2010 sourced from Orzechowski & Walker, Tax Burden on Tobacco, 2009; media reports. http://www.tobaccofreekids.org/research/factsheets/pdf/0097.pdf

Exhibit 3.2: Major NYS Legislative Actions Affecting the State Cigarette Tax, 1980-2010

Year Action

1985 Enacted Cigarette Marketing Standards Act prohibiting wholesale/retail dealers from engaging in activities that would destroy competition, avoid the payment of cigarette taxes, or dump cigarettes onto the market.

1989 Tax extended to include tobacco products with tax rate set at 15% of the wholesale price of tobacco products.

1993 Tax rate increased from $0.195 to $0.28 for each 10 cigarettes ($0.56/pack of 20).

2000 Tax rate increase of $0.55 effective March 1, 2000 bringing total tax to $1.11/pack.

2000 Sale of cigarettes over the Internet banned.

2002 Tax rate on cigarettes increased to $1.50 per pack. Tax on tobacco products increased from to 37% of wholesale price.

2008 Tax rate on cigarettes increased to $2.75/pack. Snuff added to tax base and taxed at $0.96/ounce.

2009 Tax rate on tobacco products excluding cigarettes and snuff increased to 46% of wholesale price.

2010 Tax rate on cigarettes increased to $4.35/pack. Tax on snuff increased to $2/ounce and the wholesale tax on other tobacco products such as cigars and pipe/chewing tobacco increased to 75%.

Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget, Economic and Revenue Outlook.

Alcoholic Beverage Tax

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4.0 ALCOHOLIC BEVERAGE TAX

4.1 Overview

New York State adopted the current excise tax on Alcoholic Beverages in 1933 under Article 18 of the State Tax Law. In FY 2010, the tax generated $225.6 million, accounting for 0.39% of NYS tax revenues and 0.18% of all State revenues. All revenues from the tax are deposited in the State’s General Fund. Alcoholic Beverage Control Fees. NYS distil- lers, brewers, wholesalers, retailers, and others who sell alcoholic beverages must be licensed by the State Liquor Authority. License fees vary by beverage and by the location of the entity applying for the license.

4.2 The NYS Alcoholic Beverage Taxpayer

The State Alcoholic Beverage Tax is levied on registered distributors and on non-commercial importers of alcoholic beverages. Anyone not registered as a distributor with the NYS Department of Taxation and Finance is prohibited from importing liquor for sale in NYS and NYC.

4.3 The NYS Alcoholic Beverage Tax Base

NYS imposes the Alcoholic Beverage Tax on beer and similar fermented malt beverages, cider, wine, liquor and all distilled or rectified spirits sold or used in the State. The taxes listed in Table 4.1 are included in the final price of the beverage paid by the consumer. NYS and local sales taxes are imposed on the total price of alcoholic beverage which includes NYS/NYC Alcoholic Beverage Taxes. Exemptions from the tax include:

Alcoholic beverages sold to the U.S. government or its agencies/instrumentalities. State and local governments are not exempt from the tax.

Alcoholic beverages sold to diplomatic missions and diplomatic personnel for their own use and not for resale.

Sales of alcoholic beverages to the United Nations for official use within the confines of its facilities.

Sales of non-alcoholic beer, wine and liquor. Sales to or by holders of certain NYS

Liquor Authority permits and licenses. Alcohol sold for non-beverage purposes to

a holder of an industrial alcohol permit or alcohol permit issued by the SLA.

Sales of wine at retail in sealed containers to a regularly organized church, synagogue or religious organization for sacramental purposes.

NYS headquartered brewers are allowed an exemption for the first 200,000 barrels of beer brewed and sold in the State each calendar year.

Table 4.1: NYS Alcoholic Beverage Tax Rates, 2010 Beverage Rate/Gallon

Liquor over 24% Alcohol Content

$6.43

Liquor 2%-24% Alcohol Content

2.53

Beer 0.14 Wine/Wine Coolers 0.30 Cider Over 3.2% Alcohol Content

3.79

Source: Handbook of NYS and Local Taxes, 2010 p. 28

4.4 Trends in NYS Alcoholic Beverage Tax Revenues

Current dollar tax revenues pictured in Figure 4.1 increased by 27% from FY2000 to FY2010. In constant dollars, FY2010 revenues were 0.9% below those in FY2000.

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Figure 4.2 shows that constant dollar tax revenues have been decreasing during the past 25 years reflecting the overall decline in drinking. The surge in revenues in 1991 was a result of changes in the tax law.

4.5 History of the NYS Alcoholic Beverage Tax

Prior to 1896, local governments in NYS levied license fees on the sale of alcoholic beverages. NYS took over the licensing function in 1896 and in 1933 imposed a volume tax on liquor, wine and beer. The several base and rate changes to the tax since 1980 are summarized in Exhibit 4.2.

4.6 Alcoholic Beverage Taxes in NYS Local Jurisdictions

NYC is the only jurisdiction in the State with statutory authority to levy a tax on alcoholic beverages. The tax is imposed on the sale of beer and liquor by licensed distributors and non-commercial importers located in the City. The tax rate is $0.12 cents per gallon of beer and $0.264 per liter of liquor with alcohol content greater than 24%. The City does not tax wine. NYC also imposes a tax on retail licenses for the privilege of selling beer, wine and liquor at retail. The tax is 25% of the NYS license fee.

4.7 The Alcoholic Beverage Tax in Other States

All 50 states levy either an ad valorem tax or a volume tax on alcoholic beverages. State taxes generally vary by type of beverage and by alcoholic content; with higher-alcohol content beverages taxed at higher rates (see Exhibit 4.1).

4.8 Issues and Concerns

Bootlegging. Although not as widespread as cigarette bootlegging, there is some tax evasion resulting from the transportation of liquor from low-tax states for sale in NYS.

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Exhibit 4.1: Alcoholic Beverages Tax Rates by State, 2010 ($ per gallon)

State Spirits Wine Beer State Spirits Wine Beer

Alabama a 1.70 1.05 Nebraska 3.75 0.95 0.31 Alaska 12.80 2.50 1.07 Nevada 3.60 0.70 0.16 Arizona 3.00 0.84 0.16 N. Hampshire a b 0.30 Arkansas 2.58 0.77 0.21 New Jersey 5.50 0.88 0.12 California 3.30 0.20 0.20 New Mexico 6.06 1.70 0.41 Colorado 2.28 0.28 0.08 New York 6.44 0.30 0.14 Connecticut 4.50 0.60 0.20 N. Carolina a 2.34 1.00 Delaware 5.46 0.97 0.16 N. Dakota 2.50 0.50 0.16 Florida 6.50 2.25 0.48 Ohio a 0.32 0.18 Georgia 3.79 1.51 1.01 Oklahoma 5.56 0.72 0.40 Hawaii 5.98 1.38 0.93 Oregon a 0.67 0.08 Idaho a 0.45 0.15 Pennsylvania a b 0.08 Illinois 8.55 1.39 0.23 Rhode Island 3.75 0.60 0.11 Indiana 2.68 0.47 0.12 S. Carolina 5.42 1.08 0.77 Iowa a 1.75 0.19 S. Dakota 3.93 0.93 0.27 Kansas 2.50 0.30 0.18 Tennessee 4.40 1.21 0.14 Kentucky 6.46 0.50 0.08 Texas 2.40 0.20 0.20 Louisiana 2.50 0.11 0.32 Utah a b 0.41 Maine a 0.60 0.35 Vermont a 0.55 0.27 Maryland 1.50 0.40 0.09 Virginia a 1.51 0.26 Massachusetts 4.05 0.55 0.11 Washington a 0.87 0.26 Michigan a 0.51 0.20 West Virginia a 1.00 0.18 Minnesota 5.03 0.30 0.15 Wisconsin 3.25 0.25 0.06 Mississippi a 0.43 0.43 Wyoming a b 0.02

Missouri 2.00 0.42 0.06 Dist. of Columbia 1.50 0.30 0.09

Montana a 1.06 0.14 Note: Does not include local government taxes. a In 18 states, the government directly controls sales of distilled spirits. b All wine sales are through state-run stores. Revenue is generated from various taxes, fees and net profits. Source: Tax Foundation State Sales, Gasoline, Cigarette, and Alcohol Tax Rates by State, 2000-2010.

Exhibit 4.2: Major NYS Legislative Actions Affecting the NYS Alcoholic Beverage Tax, 1980-2010

Year Action 1980 Liquor measurements converted to liters; tax rates imposed from $0.211/liter for liquor with 24% or less alcohol to

$0.859/liter with greater than 24% alcohol. 1990 Increased tax rates across all categories of alcoholic beverages.

1993 Limited amount of alcohol which can be brought into NYS to 90 liters.

2008 Flavored malt beverages which had been taxed at the same rate as beer to be taxed as low alcohol liquor.

2009 Tax rate on beer increased to $0.14/gallon effective 5/1/09.Tax rate on wine increased from $0.1893 to $0.30/gallon.


Motor Fuel Tax

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5.0 MOTOR FUEL TAX

5.1 Overview New York State adopted the Motor Fuel Tax in 1929 under Article 12A of the State Tax Law. In FY 2010, the tax generated $507 million, accounting for .09% of NYS tax revenues and .04% of all State revenues. Of the $507 million, 80% was deposited in the Dedicated Highway and Bridge Trust Fund and 20% in the Dedicated Mass Transportation Trust Fund.1 Motor fuel distributors operating in NYS must also pay the Petroleum Business Tax (see Section 12) and NYS/local Sales Taxes. The State Sales Tax on motor fuel is capped at $.08/gallon. An additional ¾ cent per gallon capped Sales Tax applies to motor fuel sold in the Metropolitan Commuter Transportation District. 5.2 The NYS Motor Fuel Taxpayer Under NYS Law, the Motor Fuel Tax must be passed through to the final consumer. It is imposed on diesel motor fuel at the point of first taxable sale/use in the State. It is imposed on other motor fuel, including gasoline, upon first import into, or production within, NYS. 5.3 The NYS Motor Fuel Tax Base The current $0.08/gallon excise tax is imposed primarily on fuel used by motor vehicles operating on NYS public highways and on fuel used in recreational motorboats operating on the State’s waterways. Motor Fuel Tax revenues are reduced by exemptions from the tax and by refunds for certain purchases. Exemptions include:

Kerosene and crude oil Sales to state, local and Federal

governments and the United Nations Qualifying Native American nations Fuel sold to certain exempt organizations. 85% ethanol fuel products (E-85) Compressed natural gas

Other exemptions apply only to the tax on diesel motor fuel. They are:

Certain sales for heating purposes Sales of certain airplane fuel. 20% blend biodiesel fuel (B-20)

Full and partial refunds and credits for tax paid are available for fuel used by:

Omnibus carriers or taxicabs Non-public school vehicle operators,

exclusively for education-related purposes Volunteer ambulance services.

5.4 Trends in NYS Motor Fuel Tax Revenues From FY2000 to FY2010 the current dollar revenues pictured in Figure 5.1 declined slightly; constant dollar revenues fell by 24.0%.

Over the last 25 years, constant dollar Motor Fuel Tax revenues have generally been declining. The increase in the late 1980s shown in Figure 5.2 below was due to the implementation of the State’s first import taxing system for motor fuel which reduced tax evasion. 5.5 History of the NYS Motor Fuel Tax The Motor Fuel Tax rate was set at $0.08/gallon in 1972 where it has remained. Other than changes to the distribution of tax revenues

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among NYS funds, the only legislative change made since 1980 was the reduction in the tax on diesel motor fuel from $0.10/ gallon to $0.08/gallon effective January 1996.

5.6 The Motor Fuel Tax in NYS Local Jurisdictions No local jurisdiction in the State has statutory authority to impose an excise tax on motor fuel with the exception of NYC which has the authority to impose a tax on leaded motor fuel.

5.7 The Motor Fuel Tax in Other States All states impose an excise tax on motor fuels (see Exhibit 5.1). Many states also levy other taxes on motor fuel such as the NYS Petroleum Business Tax. Some states including New York impose state and/or local sales taxes on the price of motor fuel. 5.8 Issues and Concerns Price Differentials. NYS has one of the lowest excise taxes on motor fuel in all 50 states (see Exhibit 5.1). It ranks eighth highest, however, when all taxes on motor fuel are considered. Other taxes include business income and gross receipts taxes and state/local sales taxes.

In New Jersey, taxes on motor fuel are $0.15/gallon compared with the NYS rate of 0.33/gallon. This price differential reduces motor fuel sales and tax revenues for NYS.

Endnotes 1NYS Division of the Budget, 2010-2011 Executive Budget, Economic & Revenue Outlook, p. 29 http://publications.budget.state.ny.us/eBudget1011/economicRevenueOutlook/economicRevenueOutlook.pdf

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Exhibit 5.1: State Motor Fuel Tax Rates Per Gallon , 2010 State Motor Fuel

Tax Total Taxes State Motor Fuel

Tax Total Taxes

Alabama 0.16 0.17 N. Carolina 0.32 0.32 Alaska 0.08 0.08 N. Dakota 0.23 0.23 Arizona 0.18 0.19 Nebraska 0.27 0.28 Arkansas 0.22 0.22 Nevada 0.23 0.23 California 0.35 0.35 New Hampshire 0.18 0.20 Colorado 0.22 0.22 New Jersey 0.11 0.15 Connecticut** 0.25 0.41 New Mexico 0.17 0.19 Delaware 0.23 0.23 New York * 0.08 0.33 Florida 0.16 0.16 Ohio 0.28 0.28 Georgia * 0.08 0.19 Oklahoma 0.16 0.17 Hawaii * 0.17 0.30 Oregon 0.24 0.25 Idaho 0.25 0.26 Pennsylvania 0.12 0.31 Illinois * 0.19 0.36 Rhode Island 0.32 0.33 Indiana * 0.18 0.36 S. Carolina 0.16 0.17 Iowa 0.21 0.22 S. Dakota 0.22 0.24 Kansas 0.24 0.25 Tennessee 0.20 0.21 Kentucky 0.25 0.26 Texas 0.20 0.20 Louisiana 0.20 0.20 Utah 0.25 0.25 Maine 0.30 0.31 Vermont 0.19 0.25 Maryland 0.24 0.24 Virginia 0.19 0.19 Massachusetts 0.21 0.24 W. Virginia * 0.21 0.32 Michigan * 0.19 0.36 Washington 0.38 0.40 Minnesota 0.27 0.27 Wisconsin 0.31 0.33 Mississippi 0.18 0.19 Wyoming 0.13 0.14 Missouri 0.17 0.17 Dist. of Columbia 0.24 0.24 Montana 0.27 0.28

Note. Assumes a pump price of $3.00. May not include local taxes * State sales tax applies on sales of gasoline. **Includes petroleum gross tax – 7% of wholesale gasoline price. Source: NYS Department of Taxation and Finance.

Highway Use Tax

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6.0 HIGHWAY USE TAX 6.1 Overview New York State adopted the Highway Use Tax (HUT) in 1951 under Article 21 of the State Tax Law. In 1969, a Fuel Use component was added under Article 21A. Highway Use Permits are the third component of the Highway Use Tax. In FY 2010, the three components of the HUT generated $137 million, accounting for 0.24% of total NYS tax revenues and 0.11% of total State revenues. All Highway Use Tax revenues are deposited in the Dedicated NYS Highway and Bridge Trust Fund.1 6.2 The NYS Highway Use Taxpayer The Truck Mileage Tax. The Truck Mileage Tax is paid by motor carriers for the privilege of using NYS public highways. The tax does not apply to miles driven on the toll-paid portion of the NYS Thruway or to the following vehicles:

Buses; Power shovels and road-building machines; Sand spreaders and snow plows; Motor vehicles owned and operated by

governmental entities; Fire company vehicles; U.S. mail delivery vehicles; Household goods-moving vehicles; and Recreational vehicles for personal use.

Fuel Use Tax. The NYS Fuel Use Tax is paid by most trucks/tractor-trailer vehicles traveling the State highways for fuel purchased outside of NYS.2 The tax does not apply when the taxpayer operates vehicles solely on highways within the State. The tax also does not apply to:

Buses providing local transit service in NYS;

Power shovels, road building machines, road rollers and well drillers;

Road sweepers, sand spreaders and snow plows;

Tractor cranes and truck cranes; Motor vehicles owned and operated by

governmental entities; Fire company vehicles; U.S. mail delivery vehicles;

Vehicles used to move household goods; and

Recreational vehicles for personal use.

Fuel Use Tax Collections. NYS is a member of the International Fuel Tax Agreement (IFTA) among the 48 contiguous states and 10 Canadian provinces. IFTA standardizes the reporting and collection of Fuel Use taxes for motor carriers operating in two or more states/provinces and permits the carrier to report and pay all its fuel use taxes to a single (home) jurisdiction, e.g., NYS. The home state distributes these fuel taxes to all member states/provinces where the carrier’s fuel purchases occur. When interstate carriers purchase fuel in NYS, they pay the State's Fuel Use Tax, the Petroleum Business Carrier Tax (see Section 12) and NYS/local sales taxes as part of the pump price. Carriers with New York as their home state can take a credit for taxes paid per gallon in the State on their IFTA returns.

Highway Use Permits. Permits are mandatory for owners of vehicles subject to the HUT. All carriers must obtain a certificate of registration from the State for each motor vehicle subject to the tax. 6.3 The NYS Highway Use Tax Base In FY 2010, the Truck Mileage Tax accounted for more than 70% of HUT revenues; the Fuel Use Tax for about 20% and permits, 10%.3 Truck Mileage Tax. The NYS Truck Mileage Tax is a weight-distance tax with rates based on vehicle weight and miles traveled on most NYS highways.4 Separate rates apply to the truck and to the trailer if applicable. Fuel Use Tax. The NYS Fuel Use Tax has two components: (1) a Motor Fuel Tax component and (2) a Sales Tax component. The Motor Fuel Tax component is a capped $0.08/gallon. The Sales Tax component is the sum of the NYS Sales Tax rate plus the lowest county Sales Tax rate, currently 3%. An additional ¾ cent per

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gallon capped Sales Tax applies to motor fuel sold in NYC and the other 7 counties in the Metropolitan Commuter Transportation District. Highway Use Permits. The NYS registration system is based on the license plate number of each vehicle. The initial cost/annual renewal fee for a certificate of registration is $15. 6.4 Trends in NYS Highway Use Tax Revenues Highway Use Tax revenues shown in Figure 6.1 declined by 9% in current dollars from FY2000 to FY2010; constant dollar were down by 29% over the ten years.

Figure 6.2 shows that constant dollar NYS Highway Use Tax revenues have experienced a general long-term decline since 1985 with a spike in 1995 – the year after NYS became a member of IFTA – reflecting the more accurate reporting by IFTA of fuel use by vehicles operating across state lines.

6.5 History of the NYS Highway Use Tax The Truck Mileage Tax was imposed in 1951; the Fuel Use Tax in 1960. A summary of major NYS legislative changes to the tax since 1980 is presented in Exhibit 6.2. 6.6 The Highway Use Tax in NYS Local Jurisdictions No local jurisdiction in NYS has statutory authority to impose a tax on highway use. 6.7 The Highway Use Tax in Other States Three states other than NYS impose a truck mileage tax: Oregon which does not have a Fuel Use Tax, Kentucky and New Mexico. The International Fuel Tax Agreement (IFTA) discussed in Section 6.2 provides for common reporting/collection of fuel taxes but rates are set by each state/province for fuel purchased within its borders (see Exhibit 6.1).

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6.8 Issues and Concerns Tax Enforcement. State audit functions are critical to monitor carrier reporting of mileage in high fuel tax and/or weight-mileage tax states such as NYS. Under IFTA, only the home state audits Fuel Use Tax payments by its carriers. Non-transparency. The Fuel Use Tax is a complement to the Petroleum Carrier Tax discussed in Section 12 and is collected with it. This administrative procedure makes the tax non-transparent for consumers.

Endnotes 1 Based on estimates published in 2010-11 NYS Executive Budget Economic and Revenue Outlook, p.223. http://publications.budget.state.ny.us/ eBudget1011/economicRevenueOutlook/economicRevenueOutlook.pdf 2 The tax applies to vehicles with 2 axles and a gross weight of more than 26,000 pounds or 3 or more axles regardless of weight; or to vehicles used in combination and the gross vehicle weight of the combination is more than 26,000 pounds. 3NYS Division of the Budget, Economic and Revenue Outlook, p. 226. 4Tax rates generally range from $0.04/mile to $0.35/ mile plus $0.02/ton for loaded trucks weighing in excess of 74,000 pounds.

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Exhibit 6.1: State Fuel Use Taxes, 2010 State Gasoline Special Diesel State Gasoline Special Diesel Alabama 0.16 0.19 Nevada 0.23 0.27 Arizona - 0.26 New Hampshire - 0.18 Arkansas 0.22 0.23 New Jersey 0.15 0.18 California - 0.37 New Mexico - 0.21 Colorado 0.22 0.21 New York $0.40 $0.39 Connecticut 0.25 0.40 North Carolina 0.32 0.32 Delaware 0.23 0.22 North Dakota 0.23 0.23 Florida 0.30 0.32 Ohio 0.28 0.28 Georgia 0.15 0.16 Oklahoma 0.16 0.13 Idaho - 0.25 Oregon - - Illinois 0.31 0.35 Pennsylvania 0.31 0.38 Indiana 0.18 0.16 Rhode Island 0.32 0.32 Iowa 0.21 0.23 South Carolina 0.16 0.16 Kansas 0.24 0.26 South Dakota - 0.22 Kentucky 0.25 0.22 Tennessee 0.20 0.17 Louisiana 0.20 0.20 Texas 0.20 0.20 Maine - 0.31 Utah 0.25 0.25 Maryland 0.24 0.24 Vermont - 0.29 Massachusetts 0.21 0.21 Virginia 0.18 0.18 Michigan - 0.32 Washington 0.38 0.38 Minnesota 0.28 0.28 West Virginia 0.32 0.32 Mississippi 0.18 0.18 Wisconsin 0.33 0.33 Missouri 0.17 0.17 Wyoming 0.14 0.14 Montana - 0.28 Nebraska 0.27 0.27

Source: International Fuel Tax Association, Inc. 4th Quarter 2010 Final Fuel Tax Rates

Exhibit 6.2: Major NYS Legislative Actions Affecting the State Highway Use Tax, 1980-2010

Year Action

1982 Every automotive fuel carrier required to have a special Automotive Fuel Carrier permit and distinctively colored sticker for each motor vehicle required to be registered under the Highway Use Tax Law.

1990 Truck Mileage Tax applied to Thruway miles and a supplemental tax imposed equal to the base mileage tax.

1994 Truck Mileage Tax rate imposed on Thruway miles reduced by one-half and eliminated effective 1996. Vehicles with gross loaded weights below 26,000 pounds and with fewer than 3 axles excluded from Fuel Use Tax. NYS signed on to the International Fuel Tax Agreement (IFTA) effective January 1996.

1995 Fuel Tax rate on diesel reduced from $0.10 to $0.08/gallon. 1996 Truck Mileage Tax eliminated on miles driven on the toll-paid portion of the NYS Thruway. 1998 Truck Mileage Tax supplemental tax reduced by 50%. 2000 Truck mileage supplemental tax reduced by 20%. 2006 Fuel Use Tax on alternative fuels exempted. 2007 Permit system replaced with a registration system to comply with Federal law.


Auto Rental Tax

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7.0 AUTO RENTAL TAX 7.1 Overview New York State adopted the Auto Rental Tax in 1990 under Article 28-A of the State Tax Law. In June 2009, a supplemental tax was levied on the price of car rentals in the Metropolitan Commuter Transit District (MCTD). In FY 2010, the tax generated $76 million, accounting for 0.13% of NYS tax revenues and 0.06% of all State revenues. Tax receipts were deposited in the NYS Dedicated Highway and Bridge Trust Fund and the MTA Financial Assistance Fund. 7.2 The NYS Auto Rental Taxpayer The Auto Rental Tax applies to the price of passenger vehicles with a gross weight of 9,000 or less rented by a resident/nonresident regardless of where the vehicle is registered. The tax does not apply to car leases covering a period of one or more years. 7.3 The NYS Auto Rental Tax Base The Auto Rental Tax is imposed at a rate of 6% on vehicle rental charges; the supplemental MCTD tax is 5%. Tax revenues are reduced by exemptions given to vehicles rented by:

Disabled veterans Federal, State/ local government agencies Foreign consulates/diplomats and the United

Nations Certain non-profit organizations.

NYS, MCTD and local sales taxes are imposed on the full auto rental price including the Auto Rental Tax. 7.4 Trends in NYS Auto Rental Tax Revenues FY2010 current dollar revenues pictured in Figure 7.1 increased by 48% over FY 2000; constant dollar revenues grew by 15%.

As seen in Figure 7.2, Auto Rental Tax revenues are sensitive to economic conditions in the State.

7.5 History of the NYS Auto Rental Tax The one change to the tax was the addition of the MCTD Supplemental Tax in 2009. 7.6 The Auto Rental Tax in NYS Local Jurisdictions No local government in NYS levies the tax. 7.7 The Auto Rental Tax in Other States Auto rentals are taxed in all but 7 states (see Exhibit 7.1). 7.8 Issues and Concerns Dedicated Use of Tax. Tax receipts are used to fund expenditures unrelated to auto rentals, i.e. MTA Financial Assistance Fund expenditures.

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Exhibit 7.1: Auto Rental Taxes in the States, 2010 State Government

Level Tax Rate State Government

Level Tax Rate

AL State 3% of gross proceeds from the lease MT State 4% per rental transaction AK State 10% per rental transaction NE Omaha $6 per rental transaction* Anchorage 18% per rental transaction, including

10% Alaska Motor Vehicle Rental Tax and 8% Motor Vehicle Rental Tax

ND State 1% per rental transaction*

AR State 10% per rental transaction (two 5% taxes imposed)*

NH State 8% per rental transaction

AZ Phoenix 2% plus 3.25% or $2.50 per rental transaction, whichever is greater*

NM State $2 per day*

CA State 2.5% per rental transaction* NV State 6% per rental transaction* CO State $2 a day statewide* Las Vegas and

Reno 8% per rental transaction, including 6% Nevada Government Services Fee*

Colorado Springs and Denver

$2 a day statewide; 1% -3.75% per rental transaction*

NY

State 6% per rental transaction* plus 5% MCTD tax**

CT State $1 per day* OH Cleveland $6 per rental transaction* FL State $2 per day* OR Lane, Medford

and Multnomah Counties

5% of the gross rent or 10%-17.5% per rental transaction

GA State 3% per rental transaction* PA State $2 per day* Atlanta 3% per rental transaction* Philadelphia

County and City

2% per rental transaction, plus $2 per day public transportation fee*

HI State $3 per day* RI State 6% per rental transaction* ID City of Hailey 3% per rental transaction* SC Horry County 1.5% per rental transaction* IL Chicago 6%/rental transaction plus rental motor

vehicle lease tax* TN State 1% per rental transaction*

IN Marion County (Indianapolis)

4% per rental transaction*

Nashville and Memphis

1% - 2% per rental transaction,*

IA State 5% per rental transaction* TX State 5% per rental transaction plus motor vehicle sales tax

KY State 3% per rental transaction* Dallas and surrounding counties

5% per rental transaction plus motor vehicle sales tax

LA State 3% per rental transaction* UT State 2.5% per rental transaction* MA State $0.60 per rental transaction* Salt Lake and

surrounding counties

3%-7% per rental transaction plus 2.5% per rental motor vehicle rental tax*

Boston $10.60 per rental transaction, including $.60 t MA Parking Surcharge*

VA State 10% per rental transaction

MD State 11.5% per rental transaction on passenger vehicles

WA State 5.9% per rental transaction*

ME State 10% per rental transaction Spokane, and surrounding areas

0.8%-1% per rental transaction plus 5.9% state car rental excise tax*

MI State 2% per rental transaction* WI State 5% per rental transaction MN State 6.2% per rental transaction* Exposition

District 3% per rental transaction plus 5% state rental vehicle fee and $2 per rental transaction regional transit district tax *

MO Kansas City $4 per day* Dist. of Columbia

10% per rental transaction

*General Sales Taxes imposed on car rental transaction. ** The NY Metropolitan Commuter Transportation District (MCTD) comprises NYC and 7 other counties: Dutchess, Nassau, Orange, Putnam, Rockland, Suffolk, and Westchester. Source: Data supplied to author by Enterprise Holdings, November 2010.

Corporation Franchise Tax

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8.0 CORPORATION FRANCHISE TAX 8.1 Overview New York State adopted the Article 9A Corpor- ation Franchise Tax in 1917 under the State Tax Law. The tax is imposed on domestic/foreign corporations for the privilege of exercising their corporate franchise, doing business, employing capital, owning or leasing property or maintain- ing an office in NYS, with some exceptions (see Section 8.2). In 1982, NYS levied a temporary 18% surcharge on corporate taxpayers doing business in the 12-county Metropolitan Commuter Transportation District (MCTD). The surcharge, reduced to 17% in 1983, is still in place. In FY2010, the 9A Corporation Franchise Tax generated $2.5 billion, accounting for 4.4% of NYS taxes and 2% of all State revenues. Of the $2.5 billion, 84% was deposited in the State General Fund and 16% in the Mass Trans- portation Operating Assistance Fund.1 Corporations doing business in the MCTD also pay the Metropolitan Commuter Transportation Mobility Tax at a rate of $0.34/$100 of payroll for employees working in the 12-county District. The State distributes all proceeds from the Mobility Tax to the MTA. 8.2 The New York State Corporation Franchise Taxpayer NYS Article 9A Corporation Franchise Taxpayers are either standard corporations – referred to as C Corporations – or corporations which have elected State S Corporation status.2 In 2005, of all 9A Corporation Franchise taxpayers, 42% filed as C Corporations and 58% as S Corporations.3 Companies in the Finance and Insurance Sector pay the largest proportion of C Corporation taxes accounting for 24% of the total. The Trade Sector is second with 18% and the Manu- facturing Sector third with 17%.4

Treatment of Special Corporations. Unlike C Corporations, the income of S Corporations is not taxed by the Federal and NYS governments until it is distributed to owners/shareholders, with the exception of a minimum tax described in Section 8.3. For Limited Liability Companies choosing to be treated as partnerships, income is not taxed until it is distributed to owners.5

Similar to C Corporations, S Corporations and LLCs offer limited liability protection. Unlike sole proprietorships and partnerships, S Corpor- ation and LLC owners cannot be held personally responsible for company debts other than for NYS sales and withholding taxes. Differences between S Corporations and LLCs are summarized in Table 8.1.

Table 8.1: Comparison of S Corporations and Limited Liability Corporations in NYS

S Corporation

Limited Liability

Corporation NYS Tax Applied

NYS 9A Corporation Franchise Tax

NYS Personal Income Tax*

Distribution of Profits

Profits/losses split proportionate to the percent of shares owned by each owner/shareholder

Flexibility in splitting profits/losses

Ownership

Corporation may have no more than 75 shareholders – who may not be other corporations or LLCs

No restrictions on ownership

Operational Control and Procedures

Board of Directors/ Officers manage the company; required to follow the same formalities and record keeping procedures as C corporations

Management responsibilities may be delegated to non-owners

Employment Taxes

Amounts paid to employees and owners as salaries are subject to Federal self-employment taxes (Social Security and Medicare taxes)

Entire Net Income (ENI) of business is subject to Federal self-employment taxes (Social Security and Medicare taxes)

*Unless the LLC chooses to be taxed as a corporation.

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Regulated Investment Companies and Real Estate Investment Trusts. Regulated Investment Companies (RICs) and Real Estate Investment Trusts (REITS)6 are subject to the NYS 9A Corporation Franchise Tax on their entire net income base (see Section 8.3). Because the taxable income of both REITs and RICs is calculated for Federal and NYS corporate tax purposes after a deduction for dividends paid, they are generally taxed solely on undistributed income. To the extent that an REIT/RIC passes through its income to shareholders, the company pays no State 9A Corporation Franchise Tax other than the fixed-dollar minimum tax or the minimum alternative tax. Undistributed income is subject to the 9A Corporation Franchise Tax and shareholders pay the PIT for income received. Exempt Corporations. Certain corporations conducting business in the State are exempt from the 9A Corporation Franchise Tax. They are:

Corporations subject to taxation under other

parts of the NYS Tax Law including banks, insurance companies and petroleum companies;

Not-for-profit and religious, charitable and educational corporations exempt from Federal income taxation. Section 13 of the NYS Tax Law imposes a 9% tax on business income earned from activities not related to the exempt purpose of certain non-profit entities;

Entities operating as trusts and exempt from the Federal Income Tax.

Taxpayer Reporting. Each corporation subject to the NYS Corporation Franchise Tax must file an annual tax return reporting its income and capital. An affiliated group of corporations may file on a separate return basis or on a combined return basis.

Under separate entity reporting, a

corporation with sufficient nexus – the legal term for connection – with NYS is required to file its own income tax return.

Under combined reporting, an affiliated group of taxpayers meeting certain capital

stock ownership and unitary business tests7 file combined reports if filing on a separate basis would distort the activities, business, income, or capital of the taxpayers. Combined reporting requires that companies combine profits and losses from all companies in the combined return including those located in other states.

Effective TY2007, NYS corporate taxpayers with substantial inter-corporate transactions must report income on a combined basis in calculating their 9A Franchise Tax liability.

8.3 The NYS 9A Corporation Franchise Tax Base

S Corporations are subject to a fixed dollar minimum tax ranging from $25 to $4,500 depending on NYS-source gross income. C Corporations pay the tax on one of four bases, whichever produces the highest tax. They are:

Entire net income (ENI) base – a tax rate of 7.1% is imposed on a corporation’s entire net income (ENI) allocated to NYS. Certain small businesses with an ENI of $290,000 or less and certain manufacturing/emerging technology companies pay a 6.5% rate.

Alternative minimum tax (AMT) base – a tax rate of 1.5% is imposed on a corporation’s ENI adjusted to reflect certain Federal tax preference items and adjustments and NYS-specific net operating loss modifications.

Capital base – a 0.15% tax rate applies to allocated capital, with the maximum tax capped at $350,000 for manufacturing/ qualified emerging technology companies and $10 million for all other taxpayers. The $10 million cap reverts to $1 million for tax years effective January 1, 2011.

A fixed dollar minimum tax ranging from $25 to $5,000 is imposed based on the taxpayer’s NYS-source gross income.

In addition to the tax paid on the highest of the four alternative bases, C Corporations pay a tax of 0.9 mills/dollar of subsidiary capital allocated to NYS. Entire Net Income. Of all C Corporations, 90% pay on the entire net income (EIN) base.8 The

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starting point for calculating State EIN is Fed- eral corporate taxable income which is modified to arrive at State ENI. Once modified, State ENI is divided into three types of income which are treated differently for purposes of the 9A Corporation Franchise Tax: subsidiary income, business income and investment income. Subsidiary Income. Income from subsidiaries is not taxed by NYS for corporate income tax purposes.9 Other states tax subsidiary income if the taxpayer has its headquarters in their state. NYS’s decision not to do so was made in an effort to retain and attract corporate headquarters.

In 2008, NYS, with its 56 corporate headquarters, was ranked second to Texas in the number of Fortune 500 companies headquartered in the State. Texas, with its 64 headquarters, has a corporate income tax but no personal income tax.10

Investment Income. Investment income is cal-culated as gains and losses from investment capital. Regardless of whether its business is conducted in or outside NYS, the taxpayer is permitted to allocate investment income using the Investment Allocation Percentage.

The Investment Allocation Percentage is not based on the taxpayer’s corporate activities but on the activities of the corporation(s) in which it has invested.

Business Income. Business income is defined as a taxpayer’s entire net income minus subsidiary and investment income. How much of a corporation’s income may be taxed by the State is determined by using what is called an allocation formula in NYS/NYC and an apportionment formula elsewhere.

Until 2005, income was allocated based on a 3-factor formula that took into account the share of a corporation’s total property, payroll and sales in NYS. From 1976 until 2006, the receipts factor was double-weighted. Effective 2007, a one-factor formula based solely on sales has been used for purposes of allocation.

The impact on individual companies of the change to a one-factor allocation formula depends on the location of its production facilities, payroll and sales. A company with production facilities and/or payroll in NYS but no State-based sales will apportion no corporate income to the State and thus pay no 9A Franchise Tax. A company with NYS nexus – the term for connection in tax law – which makes sales to NYS customers but has no production facilities or payroll in the State must apportion corporate income to it and is liable for the tax on that income. 9A Corporation Franchise Tax Liability. Once taxable income is determined, 9A Corporation Franchise Tax liability is calculated. More than 25 credits are available that can be applied to GCT liability to reduce taxes on a dollar-for-dollar basis. 8.4 Trends in NYS 9A Corporation Franchise Tax Revenues

FY2010 current dollar revenues pictured in Figure 8.1 increased 10.6% over FY2000. In constant dollars, 2010 revenues were 13.9% below those in FY2000 and 45% below the revenues in the 2007 peak year.

Figure 8.2 shows that 9A Corporation Franchise Tax revenues generally rise and fall with fluctuations in the economy, frequently with larger changes especially on the downside of the business cycle.

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8.5 History of the NYS 9A Corporation Franchise Tax The current 9A Corporation Franchise Tax was established in 1944 when it was linked to the Federal Corporate Income Tax. Structural reforms that change the definition of Federal taxable income (e.g., deductions for depreciation) have a direct impact on the NYS definition of taxable income unless the State makes modifications to its tax law. Many legislative changes to the tax have been made since 1944, including the authorization of S Corporation election for NYS tax purposes in 1980. Significant legislative changes to the 9A Corporation Franchise Tax since 1980 are summarized in Exhibit 8.2. 8.6 Taxing Corporate Income in NYS Local Jurisdictions NYC is the only local government in the State with statutory authority to levy its own tax on corporations. The City imposes its General Corporation Tax (GCT) on most corporations that have business activities, employ capital, own/lease property or maintain an office in the City, with certain exceptions.11

Corporations liable for the GCT compute their tax liability using four different methods and pay on the one that produces the largest tax payment. Under the entire net income (ENI) base, an 8.85% tax rate is imposed on entire net income allocated to NYC.12 In addition to the tax paid under the highest of these four methods, the City

levies a 0.075% tax on taxpayer subsidiary capital allocated to NYC. NYC treats S Corporations in the same manner as C Corporations for purposes of the GCT.

8.7 Corporate Income Taxation in Other States

A tax on corporate income is levied by all states with the exception of Nevada, South Dakota, Texas, Washington and Wyoming (see Exhibit 8.1). Ohio has replaced its tax on income with a gross receipts taxes. Thirty-one states impose significant taxes/fees on S Corporations and LLCs; 19 impose minimal taxes/fees on them.13 Five states give all or some local governments the option to impose a corporate income tax. A few other states permit local governments to impose alternative-based business taxes such as gross receipts taxes. 8.8 Issues and Concerns High Tax Rates. Most 9A Corporation Franchise Tax payments are generated by companies doing business in NYC. The combined 15.95% NYS/NYC tax rate on corporate income is the highest imposed in any jurisdiction in the nation. The MCTD Mobility Tax levied in addition to the NYS/NYC corporate income taxes increases the gap between NYC and other areas. Tax Expenditures. The revenue loss attributable to tax expenditures related to the 9A Corporation Franchise Tax is estimated at $3.0 billion in FY2010 – 20% more than the $2.5 billion total 9A Tax collections.13 Of the $3.0 billion in tax expenditures, an estimated $608 million was attributable to credits subtracted directly from tax liability – almost 25% of 9A Corporation Franchise Tax revenues in FY2010. Credits with an estimated value of more than $100 million in FY2010 were:

Qualified Empire Zone Enterprise Tax Credits ($160 million);

Brownfields Tax Credits ($158 million); Empire State Film Production Credit ($115

million).

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Each of these three credits and several others taken against 9A Corporation Franchise Tax liability are refundable. This means that if the value of the credit exceeds tax liability, the State refunds the remainder to the taxpayer. Some credits can be carried forward for as many as 15 years creating uncertainty as to their revenue impact in any one year. Combined Reporting. NYS requires certain corporate taxpayers to file on a combined basis which requires that they combine profits from all related subsidiaries including those in other states to determine what portion of corporate profits are taxable by NYS. In implementing the rules related to combined reporting, the State has to address several issues such as: (1) defining which members comprise the group for combined reporting, (2) deciding how to combine the group’s income and (3) how to treat inter-company transactions, net operating losses, credits and deductions as well as non-business income. Not-for-Profit Corporations. Income from activities not attributable to the primary purpose of not-for-profit corporations is important to identify and is potentially taxable. Double Taxation of Income. A major issue regarding corporate taxation in NYS and in other jurisdictions is the double taxation of dividends. In NYS, C Corporation income is taxed prior to distribution under the 9A Corporation Franchise Tax. The distributed income, either as shares or dividends, is taxed again under the Personal Income Tax paid by individual shareholders. For S Corporations and LLCs, profits are not taxed until they are distributed to owners/shareholders. Endnotes 1 Based on estimates for 2010 published in 2010-11 NYS Executive Budget, Economic and Revenue Outlook, p. 273. http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 2 An S Corporation is a regular corporation that has elected S Corporation status for Federal tax purposes. It must also elect State S Corporation status to be treated as such for NYS Tax purposes.

3 Based on 2005 NYS Corporation Tax Statistical Report as cited in the Economic and Revenue Outlook, Op.cit., p.280. 4 Ibid. p. 282. 5 An LLC is an unincorporated organization of one or more members with limited liability for the contractual and other liabilities of the company. LLCs are generally taxed as partnerships but may choose to be taxed as corporations. 6 A REIT is a corporate entity investing in real estate that is required to distribute 90% of its income to investors. A RIC is an investment company eligible to pass capital gains, dividends and earned interest directly to shareholders to be taxed at the individual level. 7 In a unitary business there is a sharing or exchange of value between the members of the group as demonstrated by: (1) centralized management or a common executive force; (2) centralized administrative services or functions resulting in economies of scale; or (3) flow of goods, capital resources or services demonstrating functional integration. 8Economic and Revenue Outlook, Op.cit. p.281 9A subsidiary is defined as 50% or more of ownership by one company of another company. 10Money Magazine

http://money.cnn.com/magazines/fortune/fortune500/2010/states/TX.html 11Major exceptions include insurance companies and corporations subject to the NYC Banking Corporation Tax or regulated utilities subject to the Utility Tax and certain other corporations such as those organized exclusively for the purpose of holding title to property and turning over net income from the property to an exempt organization. 12 The other three bases are the alternative tax base, the total capital base and a minimum tax which is calculated on a sliding scale, ranging from $25 to $5,000 based on taxpayer annual receipts allocated to NYC. 13NYS 20th Annual Report on Tax Expenditures, p.66. http://publications.budget.state.ny.us/eBudget1011/fy1011ter/TaxExpenditure10-11.pdf

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Exhibit 8.1: State Corporate Income Tax Rates, 2010 State Tax Rates State Tax Rates State Tax Rates Alabama 6.5% Kentucky 4.0-6.0% North Dakota 2.1-6.4% Alaska 1.0-9.4 Louisiana 4.0-8.0 Oklahoma 6.0 Arizona 6.968 Maine 3.5-8.9 Oregon 6.6-7.9 Arkansas 1.0-6.5 Maryland 8.25 Pennsylvania 9.99 California 8.84 Massachusetts 8.75 Rhode Island 9.0 Colorado 4.63 Michigan 4.95 South Carolina 5.0 Connecticut 7.5 Minnesota 9.8 Tennessee 6.5 Delaware 8.7 Mississippi 3.0-5.0 Utah 5.0 Florida 5.5 Missouri 6.25 Vermont 6.0-8.5 Georgia 6.0 Montana 6.75 Virginia 6.0 Hawaii 4.4-6.4 Nebraska 5.58-7.81 West Virginia 8.5 Idaho 7.6 New Hampshire 8.5 Wisconsin 7.9 Illinois 7.3 New Jersey 9.0 Dist. of Columbia 9.975 Indiana 8.5 New Mexico 4.8-7.6 Iowa 6.0-12.0 New York 7.1 Kansas 4.0 North Carolina 6.9

Note: Nevada, South Dakota, Washington and Wyoming do not impose a corporate income tax. Texas imposes a Franchise Tax, known as margin tax, on certain entities. Ohio has replaced its tax based on income with a gross receipts tax. State data do not include local government rates. Sources: Federation of Tax Administrators, Range of State Corporate Income Tax Rates. Tax Foundation, State Corporate Income Tax Rates as of February 1. 2010.

Exhibit 8.2: Major NYS Legislative Actions Affecting the 9A Corporation Franchise Taxe, 1980-2010 Year Action

1981 Temporary 18% surcharge imposed on tax liability attributable to business activity in the Metropolitan Commuter Transportation District (MCTD). Reduced to 17% in 1982.

1994

Changed depreciation rules to conform to Federal Tax Reform Act of 1986. Provided for the formation of Limited Liability Companies (LLCs) and Limited Liability Partnerships (LLPs). Reduced Alternate Minimum Tax (AMT) rate from 5.0% to 3.5%.Provided that the sales factor in calculation of the business allocation of the AMT base be double-weighed.

1995 Extended 17% surcharge until 1997.

1997 Conformed treatment of State S Corporations to their treatment at the Federal level. Extended 17% surcharge for 4 years.

1998

Reduced AMT rate from 3.5% to 3.0%. Reduced tax rate on Entire Net Income (ENI) from 9.0% to 7.5%; reduced small business rate reduction from 8% to 7.5%. Reduced minimum tax from $325 to $100 for corporations with payroll below $250,000 and from $325 to $225 for corporations with payroll between $250,000 and $500,000.

1999 Reduced AMT rate from 3.0% to 2.5%.Reduced tax on airlines by changing formula used to apportion income to NYS.

2000 Reduced the tax rate from 7.5% to 6.85% for business with net income less than $200,000 and provided for rates ranging up to 7.5% for businesses with net income less than $290,000.

2003 Provided that S corporations would be taxed at a fixed dollar minimum for 2003, 2004 and 2005. 2004 Provided a temporary adjustment to the fixed dollar minimum tax schedule for 2004 and 2005.

2005 Reduced tax rate on businesses with net income less than $200,000 from 6.85% to 6.5%. Enacted phase-in of single sales factor allocation.

2006 Provided the State code regarding treatment of S corporations to the Federal code. Provided a tax credit for manufacturers of qualified bio-fuel products.

2007 Reduced rate on the ENI base from 7.5% to 7.1%. Reduced rate on the ENI base from 7.5% to 6.5% for qualifying manufacturing/emerging technology companies. Reduced AMT rate from 2.5% to 1.5%.

2008

Changed minimum tax from a tax based on gross payroll to one based on gross income. Increased capital base cap for non-manufacturers from $1 million to $10 million for three-year period. Reduced capital base tax rate from 0.178% to 0.15% and limited the tax $350,000 for manufacturers and $10,000,000 for all other taxpayers. Extended 17% surcharge for four more years.


Corporation and Utility Tax

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9.0 CORPORATION AND UTILITY TAX

9.1 Overview

Article 9 of the NYS Tax Law imposes taxes and fees on several entities including public utilities.1 It is generally referred to as the Utility Tax. In FY2010, Article 9 taxpayers, including utilities, generated $954 million, accounting for 1.7% of NYS tax revenues and 0.8% of total State revenues. Of the $954 million, 76% was deposited in the NYS General Fund, 22% in the Mass Transportation Operating Assistance Fund (MTOAF) and 2% in the Dedicated Highway and Bridge Trust Fund (DHBTF).2

Utilities and other corporations doing business in the MCTD are liable for the Metropolitan Commuter Transportation Mobility Tax imposed at a rate of $0.34/$100 of payroll allocated to the District. The Petroleum Business Tax (see Section 12) is paid by some utilities on purchases of oil used in the production of electricity and steam.

NYS/MCTD and local sales taxes apply to sales of intra-state telecommunications services and certain other utility services. Additional local government taxes apply (see Section 9.6).

Fees. Section 18-a of the Public Service Law authorizes NYS to impose a fee on public utilities, referred to as the 18-a Assessment. Since 2009, the fee has been set at 2%. It is passed along to customers in their energy bills. 9.2 The NYS Utility Taxpayer Transportation and transmission companies exercising their corporate franchise in NYS are subject to Article 9 of the State Tax Law with certain exceptions.

Most railroad and trucking companies are taxed under the Article 9A Corporation Franchise Tax but may elect to be taxed under Article 9.

Public utilities and waterworks, gas, electric, steam heating, lighting and power companies are subject to the 9A Corporation

Franchise Tax as well as specific sections of Article 9 discussed in Section 9.3

9.3 The NYS Utility Tax Base Sections 183 and 184. Under Section 183 of Article 9, transportation and transmission companies calculate the tax on their capital stock using three methods and pay on the method producing the highest tax.3 Under Section 184, a 0.375% tax on gross receipts generated within NYS is imposed on transportation and transmission companies taxed under Section 183.

Corporations principally engaged in the transportation/transmission/distribution of gas, electricity or steam are not subject to Sections 183 or 184.

The tax on telecommunications companies under Section 184 applies to telecommunications companies principally engaged in local telephone business.

Section 186. Section 186-a imposes a 2% gross receipts tax on the delivery of residential electric and gas utility services. Section 186-e imposes a 2.5% gross receipts tax on the sale of telecommunication services.

Telecommunications services include those provided by wire, cable, satellites, fiber-optics, lasers, microwaves, radio-waves and similar media. This tax also applies to services that are ancillary to the provision of telephone service such as directory information, call waiting/forwarding, and caller identification.

Telecommunications companies generate about 75% of all Article 9 tax receipts.4

9.4 Trends in Utility Tax Revenues As pictured in Figure 9.1, current and constant dollar revenues fluctuated over the decade but have been increasing since 2008. FY2010 constant dollar revenues were 31% above their FY2008 level.

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Figure 9.2 shows that constant dollar tax revenues increased from the early to the mid-1990s when a temporary surcharge on utility companies was imposed. Revenues generally declined after the surcharge was removed and again after the 2000 restructuring of the tax, but have been growing in the past few years.

9.5 History of NYS Utility Taxation NYS has taxed utility corporations since the beginning of the 20th century with extensive modifications made during the 1930s. Substantial revisions with respect to telecom-munication providers occurred in 1995 and with respect to electric, gas and other utility service providers in 2000. Major changes to the tax since 1980 are summarized in Exhibit 9.1.

9.6 Taxes on Utilities in NYS Local Jurisdictions Utilities are subject to several local government taxes in addition to those imposed by NYS. Business Taxes. NYC imposes a utility tax measured by gross income or gross operating income on utility companies and vendors of utility services.5 Sixty other NYS cities and 365 villages impose either a 1% or 3% gross receipts tax on utilities.6

Property Taxes. Utility companies calculate tax liability by multiplying the assessed value of their property – determined either by the state or local government – by rates set by local taxing jurisdictions. NYS establishes the assessed (taxable) value for special franchises given to utilities for property placed on/under/over the public way, e.g. telephone lines. All other utility property is locally assessed. For many utilities, property taxes represent the largest part of their tax bills. The three largest individual property taxpayers in NYS are utility companies. Sales Taxes. Certain cities and counties impose a selective Sales Tax on utility services. School districts in cities with fewer than 125,000 inhabitants are permitted to impose a Sales Tax on utility services – including intrastate telephone and telegraph services – at a rate of up to 3%. More than 20 city school districts do so, some at rates higher than the local Sales Taxes on other goods/services.

Surcharges. A surcharge of $0.30 per month is imposed by NYC on every wireless communication device whose place of primary use is within the City. The NYC tax is imposed in addition to the $1.20 surcharge per device imposed by the State. A surcharge of $1.00/ telephone access line per month is imposed on customers of every telephone service supplier in NYC.

0

200

400

600

800

1,000

1,200

1,400

1,600

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Figure 9.1: NYS Utility Tax Revenues, Current and Constant 2000 Dollars, 2000-2010

Current $

Constant 2000 $

Sources: NYS Department of Taxa:on & Finance Annual Sta)s)cal Report, Ic)er 2010. NYCPI used to convert series to constant 2000 $.

$ In Millions

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9.7 Taxes on Utilities in Other States

Utility corporations are taxed in all states by either the state government, by one or more local governments, or by both state and local governments. 9.8 Issues and Concerns Deregulation. Many issues pertaining to the taxation of utilities relate to deregulation, particularly of companies supplying electricity, natural gas and telecommunications services. Prior to deregulation, utilities were regulated by government and were generally permitted to service specific geographic territories. Deregula- tion has changed the marketplace so that regulated utility companies now compete with other providers in delivering electricity, natural gas and telephonic services in a wider geographic area. Because deregulation has blurred the lines between regulated companies and other providers of utility services, the rationale for differentiating between 9A Corporation Franchise Taxpayers and Article 9 Taxpayers is becoming less apparent. Most NYS corporations pay taxes based on their net income or profits. Regulated utility companies, however, pay taxes based on net income and on gross receipts.

High Taxes. Electricity and telecommunications costs in NYS are higher than those in most other states (see Exhibits 9.2 and 9.3) primarily due to State and local taxes. NYS taxes imposed on utilities include the 9A Corporate Franchise Tax, the Gross Receipts Tax and the Sales/Use Tax. Local taxes include business income/gross receipts taxes, sales taxes and property taxes. State and local surcharges and fees also contribute to high utility costs in NYS. More expensive electricity and telecommunications services give NYS a competitive disadvantage in job attraction and economic development efforts.

Non-transparency. Although Article 9 is generally referred to as the Utilities Tax, it applies to several unrelated entities such as agricultural

cooperatives. This makes the tax non-transparent to taxpayers. Endnotes 1Other entities taxed under Article 9 include newly organized or reorganized corporations, out-of-State corporations doing business in NYS and agricultural cooperatives. 2Based on estimates for 2010 published in 2010-11 NYS Executive Budget. Economic and Revenue Outlook, p. 289. http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 3The three bases are: Capital stock - 1.5 mills/dollar of net value of issued capital stock; Dividends - If dividends paid on the par value of any stock during a calendar year are 6% or more, a tax of 0.375 mills for each 1% of dividends paid, computed at par value of the stock; Flat rate - $75. 4 2010-11 NYS Executive Budget, Economic and Revenue Outlook Op.Cit. p.290. 5For most types of utility companies, the City’s tax rate is 2.35% of gross income or gross operating income. Different rates apply to bus companies and railroads, ranging from 0.10% on the gross income of commuter services to 3.52% on the gross income of railroads. 62010 Handbook of New York State and Local Taxes, p.35.http://www.tax.ny.gov/pdf/stats/policy_special/handbook_of_new_york_state_and_local_taxes_october_2010.pdf

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Exhibit 9.1: Major NYS Legislative Actions Affecting the NYS Corporation and Utilities Tax, 1980-2010

Year Action 1981 Sections 183 and 184 expanded to cover portion of gross receipts from interstate activities allocated to NYS.

1982 Temporary 18% surcharge imposed on the portions of Sections 183,184,186-a and 186-e tax liability attributable to business activity in the Metropolitan Commuter Transportation District (MCTD).

1983 Sections 186-a and 186-e expanded to cover portion of gross receipts from interstate activities allocated to NYS; surcharge reduced to 17%. Oil companies no long taxed under this section, subject to PBT.

1989 Airlines/other companies principally engaged in aviation activities transferred to 9A Corporate Franchise Tax.

1990

Section 186-a tax on telephone carrier access transferred from long distance companies to local telephone companies. Section 184 Tax on telephone/telegraph companies increased from 0.3% to 0.75% of gross receipts. Imposed a temporary 15% surcharge on taxpayers liable for tax under Sections 183, 184, 186 and 186-a . Surcharge was phased-out over a three-year period starting 1994.

1995 In response to NYS Court of Appeal decision, access charge deduction transferred from long distance telephone companies to local companies. Long distance companies removed from Section 184. Telecommunication service providers moved from Section 186-a to Section 186-e of Article 9.

1996 Reduced tax on trucking and railroad industries from 0.75% to 0.6% of gross receipts. Trucking and railroad companies permitted to be taxed under Article 9-A (net income basis) rather than under Article 9.

1997 Reduced rate for Sections 184, 186-a and 186-e taxpayers. For the purpose of computing the 17% surcharge on Section 184, 186-a and 186-e taxpayers, tax shall be computed as if the rate reduction had not occurred.

2000

Energy companies, previously taxed under Section 186 of Article 9, to pay tax under the Article 9-A corporate franchise tax. Eliminated Gross Receipts Tax (GRT) passed along to manufacturing consumers effective 1/2000. Eliminated GRT passed along to commercial consumers and phased-out gross income component of the tax over a five-year period. GRT on gas and electricity to be reduced from 2.5% to 2.0% over a five-year period for residential customers.

2002 Amended Section 186-e excise tax on telecommunication services to conform to Federal sourcing rules. The tax is imposed on gross receipts of services provided by a home service provider if the customer’s primary use is within NYS regardless of where the service originates, terminates or passes through.

2008 Extended 17% surcharge for four years. Amended Section 186-e tax on telecommunication services to conform to the sourcing rules of the Federal Mobile Telecommunications Sourcing Act relating to sales occurring on or after August 2, 2002.

Note: Legislative actions related to non-utility components of Article 9 not included. Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget, Economic and Revenue Outlook.

Exhibit 9.2: State Taxes and Fees on Wireless Telecommunications Services, July 2007 State State-Local Rate State State-Local Rate State State-Local Rate Alaska 6.76 Louisiana 6.16 Ohio 7.88 Alabama 7.4 Maine 7.27 Oklahoma 9.75 Arizona 9.95 Maryland 10.51 Oregon 1.66 Arkansas 10.08 Massachusetts 5.6 Pennsylvania 13.5 California 12.67 Michigan 6.58 Rhode Island 14.52 Colorado 10.89 Minnesota 8.5 South Carolina 9.45 Connecticut 6.8 Mississippi 9 South Dakota 11.91 Delaware 5.45 Missouri 15.73 Tennessee 11.5 Florida 16.23 Montana 5.95 Texas 14.27 Georgia 8.26 Nebraska 18.35% Utah 12.2 Hawaii 7.7 Nevada 2 Vermont 7.75 Idaho 2.12 New Hampshire 7.84 Virginia 6.5 Illinois 12.75 New Jersey 8.8 Washington 16.43 Indiana 8.55 New Mexico 11.01 West Virginia 6.01 Iowa 7.36 New York 15.94 Wisconsin 7.39 Kansas 11.12 North Carolina 8.37 Wyoming 8.17 Kentucky 10.36 North Dakota 10.58 Dist. of Columbia 11.52

Note: For flat monthly taxes and fees, average monthly consumer bill is estimated at $49.94 per month per the International Association of Wireless Telecommunications (CTIA). Source: State Tax Notes, February 18, 2008 Special Report

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Exhibit 9.3: Average Retail Price of Electricity to Customers by State, September 2010 (Cents per kilowatt-hour) State Residential Commercial Industrial Transportation All Sectors

Alabama 10.85 10.27 6.04 -- 8.99 Alaska 16.41 14.07 13.99 -- 14.82 Arizona 11.10 9.57 6.81 -- 9.85 Arkansas 8.81 7.27 5.47 11.12 7.27 California 15.24 14.33 11.12 8.62 14.05 Colorado 11.19 9.16 7.02 9.46 9.30 Connecticut 19.33 16.50 14.43 11.77 17.43 Delaware 13.80 11.38 9.66 8.86 12.00 Florida 11.47 9.74 8.82 8.49 10.60 Georgia 10.29 9.09 6.23 7.50 8.98 Hawaii 27.91 25.79 21.80 -- 25.96 Idaho 8.00 6.71 5.23 -- 6.55 Illinois 11.57 8.13 7.53 6.85 9.20 Indiana 9.55 8.33 5.92 9.10 7.69 Iowa 10.45 7.94 5.43 -- 7.74 Kansas 9.97 8.16 6.14 -- 8.27 Kentucky 8.55 7.82 5.05 -- 6.72 Louisiana 8.98 8.53 5.94 9.63 7.87 Maine 15.72 12.40 8.78 -- 12.67 Maryland 14.63 11.65 9.49 10.17 12.78 Massachusetts 15.22 15.42 13.18 664 14.60 Michigan 12.54 10.16 7.20 10.33 10.10 Minnesota 10.44 8.36 6.31 7.76 8.42 Mississippi 9.95 9.35 6.37 -- 8.65 Missouri 9.23 7.58 5.59 6.37 7.91 Montana 9.15 8.47 5.59 -- 7.79 Nebraska 9.03 7.69 6.02 -- 7.57 Nevada 12.41 9.96 7.75 9.64 9.96 New Hampshire 16.26 14.19 12.76 -- 14.79 New Jersey 16.64 14.06 11.72 11.80 14.81 New Mexico 10.69 8.77 6.13 -- 8.58 New York 18.70 16.13 9.64 14.95 16.41 North Carolina 10.29 8.21 6.19 7.16 8.77 North Dakota 8.15 7.19 5.68 -- 7..04 Ohio 11.34 9.78 6.31 8.96 9.14 Oklahoma 9.16 7.48 5.23 -- 7.59 Oregon 8.85 7.65 5.46 6.98 7.58 Pennsylvania 12.85 10.26 7.60 7.92 10.39 Rhode Island 15.94 12.89 13.06 13.57 14.14 South Carolina 10.52 8.85 5.68 -- 8.47 South Dakota 8.92 7.58 5.91 -- 7.78 Tennessee 9.23 9.58 6.62 11.23 8.62 Texas 11.63 9.22 6.34 9.90 9.41 Utah 8.82 7.28 5.08 8.75 7.09 Vermont 15.54 13.39 9.45 -- 13.20 Virginia 10.56 7.68 6.75 7.74 8.76 Washington 7.95 7.29 3.95 7.32 6.55 West Virginia 8.75 7.61 5.81 8.34 7.38 Wisconsin 12.56 9.96 6.81 -- 9.74 Wyoming 8.78 7.48 4.98 -- 6.21 Dist. of Columbia 13.79 14.14 8.47 11.02 13.85 Source: U.S. Energy Information Administration Monthly Electric Sales and Revenue Report with State Distributions Report, January 2011. http://www.eia.doe.gov/electricity/epm/table5_6_b.html

Insurance Tax

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10.0 INSURANCE TAX 10.1 Overview New York State adopted its current tax on insurance companies in 1974 under Article 33 of the State Tax Law. In 1983, the State imposed a temporary 17% surcharge on insurance companies and other corporate taxpayers doing business in the 12-county Metropolitan Commuter Transportation District (MCTD). The surcharge is still in place. Article 33-A of the NYS Tax Law imposes the Direct Writings Tax on insurance purchased from an unauthorized insurer, which is permissible under certain circumstances. In FY2010, the Insurance Tax (Articles 33 plus 33-A) generated $1.5 billion, accounting for 3.6% of NYS tax revenues and 2.6% of total State revenues. Of the $1.5 billion, 90% was deposited in the State’s General Fund and 10% in the Mass Transportation Operating Assistance Fund.1 Insurance Companies doing business in the MCTD must also pay the Metropolitan Commuter Transportation Mobility Tax imposed at a rate of $0.34/$100 of payroll allocated to the District. The State distributes all proceeds from the Mobility Tax to the MTA. 10.2 The NYS Insurance Taxpayers NYS imposes the Insurance Tax on domestic and foreign/alien2 insurance corporations, for the privilege of conducting business or otherwise exercising a corporate franchise in the State with some exceptions. Exceptions are:

Certain annuity contracts, reinsurance

premiums and health insurance contracts for persons 65 years of age and older;

Non-profit medical expense indemnity corporations and certain other health service corporations;

Non-profit property/casualty companies; Cooperative insurance companies in

operation prior to January 1, 1974. Retaliatory Taxes. Under retaliatory taxation, a state taxes a non-domiciled insurance company at the same level that its own insurance companies are taxed in the state of that company. The concept of retaliation is unique to the insurance industry and is intended to promote equal treatment of insurers across states.

NYS collects a retaliatory tax from insur-

ance corporations domiciled in other states that impose retaliatory taxes on – or do not grant exemptions on a reciprocal basis to– NYS-domiciled insurance companies;

NYS-domiciled insurance companies are permitted to take a 90% credit against their NYS Insurance Tax liability for retaliatory taxes paid to other states.

10.3 The NYS Insurance Tax Base Property/casualty insurance companies generate the largest proportion of NYS Insurance Tax revenues. In 2006, they accounted for 55% of the total. Accident and health insurers were second with 23% and life insurers third with 21%.3

Life insurance and non-life insurance companies are taxed differently under the NYS Insurance Tax Law. Life insurers are subject to an income tax component and a 0.08% tax on subsidiary capital allocated to NYS plus a tax on premiums4 written. Non-life insurers are subject solely to a tax on premiums written. Life Insurers. Companies calculate the income component using four methods and pay on the method that produces the highest tax. The four methods are:

Allocated entire net income (ENI) base – a tax of 7.1% applied to the portion of ENI allocated to NYS according to the ratio of

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NYS premiums and payroll to total premiums and payroll nationwide;5

Allocated business and investment capital base – a tax of 0.16% applied to allocated business and investment capital;

Allocated net income plus compensation alternative base – a tax of 9% applied to allocated ENI plus officers’ salaries basis. The basis is 30% of the sum of EIN plus officers’ salaries and other compensation minus $15,000 and any net loss for the reported year.

Minimum $250 tax. The second component paid by life insurers is the 0.7% tax on gross premiums – minus returned premiums – written on risks located in NYS. The total tax on a life insurance company cannot exceed 2% of taxable premiums and cannot be less than 1.5% of taxable premiums prior to the application of credits. Non-life Insurers. Non-life insurance companies pay the Insurance Tax based on gross direct premiums – minus return premiums– written on risks located in NYS. The tax rate is 2% with the exception of accident and health premiums which are taxed at the rate of 1.75%. The minimum tax, before the application of credits, is $250. Special Insurers. Certain types of insurance companies receive differential treatment under the NYS Insurance Tax law.

Captive Insurers. A captive insurer is generally a company that insures the risks of its parent or the parent’s affiliated companies. NYS imposes a tax on gross premiums written by captive insurers on risks located in the State. The maximum rate is 0.4% on direct premiums and 0.225% on reinsurance premiums. A minimum tax of $5,000 applies.

Excess Line Insurance Brokers. Excess Line brokers generally insure unique or large risks not covered by the standard lines market. NYS imposes a tax of 3.6% on premiums written by licensed excess lines insurance brokers.

Title 33-A Insurers. A direct writings tax of 3.6% is imposed on premiums. It is paid by persons who buy or renew insurance policies from companies not authorized to do business in NYS except under certain circumstances.

Fire Insurance Companies. NYS imposes a tax on foreign/alien fire insurance companies at the rate of 2% of premiums.

10.4 Trends in NYS Insurance Tax Revenues In current dollars, Insurance Tax revenues pictured in Figure 10.1 more than doubled from FY 2000 to FY2010. In constant dollars, FY2010 revenues were more than 67% above FY2000 revenues.

Changes over time in tax revenues shown in Figure 10.2 generally reflect tax law revisions to the rate and/or base and/or increases in insurance premiums rather than changes in economic conditions.

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10.5 History of the NYS Insurance Tax Prior to the adoption of Article 33 in 1974, insurance companies were taxed under Article 9 of the NYS Tax Code. The State made substantial changes to the tax in 1987 to prevent large increases in the base that would have occurred due to the broadening of the Federal insurance tax base to which it is linked. Major changes to the Insurance Tax since 1980 are summarized in Exhibit 10.1. 10.6 The Insurance Tax in NYS Local Jurisdictions No local government in NYS has legislative authority to tax insurance companies with the exception of NYC and Buffalo. Both cities impose a 2% premium tax on foreign and alien fire insurance companies. 10.7 The Insurance Tax in Other States All 50 states impose premium taxes on insurance companies for insuring risks or property in the state (see Exhibit 10.1). Eight states besides NYS also impose corporate income/franchise taxes on insurance companies: Alabama, Arkan- sas, Delaware, Florida, Illinois, Louisiana, Mis- sissippi and Nebraska. Hawaii is the only state that does not have a retaliatory tax policy. 10.8 Issues and Concerns Insurance Industry Regulation. Passage of the Federal Gramm-Leach-Bliley Act (GLBA) in 1999 removed the regulatory demarcation between banks, securities firms, and other financial institutions including insurance companies. Although GLBA confirmed the intent of Congress that insurance companies continue to be regulated by the 50 individual states, the Dodd–Frank Wall Street Reform and Consumer Protection Act – signed into law in July 2010 – is giving the Federal government an increasing role in the industry. It provides for the creation of the first office in the Federal government focused on insurance. One of the functions of the office is to monitor the insurance industry for systematic risk purposes.

Self-Insurance Programs. The increase in self-insurance programs is providing competition to conventional insurance companies that are regulated by the NYS Department of Insurance. An example of self-insurance is an employee insurance program offered through a captive insurance company formed primarily to cover the assets/risks of its parent company. The taxes paid by captive insurance companies are generally lower than taxes paid by regulated insurance companies.

Retaliation. The intent of retaliation is to provide an incentive for states to keep their tax burden on insurance companies in line with those of other states. Determining what taxes should be included in considering retaliatory actions, e.g., state income taxes, has an impact on NYS companies doing business in other states. Endnotes

1Based on estimates for 2010 published in 2010-11 NYS Executive Budget, Economic and Revenue Outlook, p. 301. http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 2Alien insurers are incorporated/organized under the laws of a foreign nation; foreign insurers under the laws of any state other than NYS. 3Distribution of tax revenue is for 2006, the latest year for which data are available. 4Premiums include all amounts received as consideration for insurance or reinsurance contracts, other than for annuity contracts. They also include premium deposits, assessments, policy fees, membership fees, and separate costs by carriers assessed upon their policyholders; and every other compensation, minus the return of dividends, and reinsurance executed. 5 In the formula, premiums have a weight of 9 and wages a weight of 1.

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Exhibit 10.1: Insurance Premium Tax Rates in the States, 2010

State Accident/ Health Life Property/

Casualty State Accident/ Health Life Property/

Casualty

Alabama 1.60% 2.30% 3.60% Nebraska 1.00% 1.00% 1.00% Alaska 2.70 2.70 2.70 Nevada 3.50 3.50 3.50

Arizona 2.00 2.00 2.00 New Hampshire 2.00 1.50 1.50

Arkansas 2.50 2.50 2.50 New Jersey 1.40 2.10 2.10 California 2.35 2.35 2.35 New Mexico 3.00 3.00 3.00 Colorado 2.00 2.00 2.00 New York 1.75 0.70 2.00

Connecticut 1.75 1.75 1.75 North Carolina 1.90 1.90 1.90

Delaware 1.75 1.75 1.75 North Dakota 1.75 2.00 1.75

Florida 1.75 1.75 1.75 Ohio 1% or 1.4% 1.40 1.40 Georgia 2.25 2.25 2.25 Oklahoma 2.25 2.25 2.25 Hawaii 4.27 2.75 4.27 Oregon Corporate excise tax and retaliatory taxes Idaho 1.70 1.70 1.70 Pennsylvania 2.00 2.00 2.00

Illinois 0.40 0.50 0.50 Rhode Island 2.00 2.00 2.00

Indiana 1.30 1.30 1.30 South Carolina 1.25 0.75 1.25

Iowa 1.00 1.00 1.00 South Dakota 2.50 2.50 2.50

Kansas 2.00 2.00 2.00 Tennessee 1.75 1.75 2.50 Kentucky 2.00 1.50 2.00 Texas 1.75 1.75 1.60

Louisiana $140 for $7,000 or less in premiums received; $225 for each additional

$10,000 Utah

0.00

2.25% of first $100,000; 0.08%

in excess of $1,000,000 2.25

Maine 2.00 2.00 2.00 Vermont 2.00 2.00 2.00 Maryland 2.00 2.00 2.00 Virginia 2.25 2.25 2.25 Massachusetts 2.28 2.00 2.28 Washington 2.00 2.00 2.00

Michigan Greater of Single Business Tax/ Retaliatory Tax

West Virginia 3.00 3.00 3.00

Minnesota 2.00 1.50 2.00

Wisconsin 0.00 2% or Income Tax 2.00

Mississippi 3.00 3.00 3.00 Wyoming 0.75 0.75 0.75

Missouri 2.00 2.00 2.00 Dist. of Columbia 1.70 1.70 1.70

Montana 2.75 2.75 2.75 Source: Provided to author by the National Association of Insurance Commissioners ©

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Exhibit 10.2: Major NYS Legislative Actions Affecting the NYS Insurance Tax, 1980-2010

Year Action

1983 17% surcharge imposed on insurance companies doing business in the Metropolitan Commuter Transportation District (MCTD).

1987 Business Tax Reform and Rate Reduction Act adopted. The Act restored pre-Federal tax reform rules to property and casualty companies and reduced tax rate on life insurance premiums. Property/casualty companies required to make several adjustments to ENI to decouple from Federal changes.

1990 Direct Writings Tax imposed on independently procured insurance under Article 33-A of the State Tax Law. Temporary surcharge imposed at 15%. Subsequent legislation eliminated the surcharge over a three-year period starting in 1994.

1991 Decoupled provisions for property/casualty taxpayers made permanent and tax rate increased on these insurers. 1993 17% surcharge extended through the end of 1995.

2003

Reformed taxes on insurers. For life insurance companies, tax liability will be the highest of four alternative bases plus 0.7% of premiums written on risks assigned to NYS or 1.5% of premiums written on risks assigned to NY State. The total amount of tax cannot exceed 2.0% of taxable premiums. For others, Non-Life Insurers: 1.75% of premiums written on risks assigned to NY State for accident and health insurers and 2.0% of premiums written on risks assigned to NY State for property and casualty insurers.

2008 Extended 17% surcharge through 2013. Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget, Economic and Revenue Outlook.

Bank Franchise Tax

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11.0 BANK FRANCHISE TAX

11.1 Overview

New York State imposed its current tax on banking corporations in 1973 under Article 32 of the State Tax Law. In 1982, NYS levied a temporary 18% surcharge on banking and other corporate taxpayers doing business in the 12-county Metropolitan Commuter Transportation District (MCTD). The surcharge, reduced to 17% in 1983, is still in place. In FY2010, the Bank Franchise Tax generated $1.4 billion, accounting for 2.4% of NYS tax collections and 1.1% of all State revenues. Of the $1.36 billion, 86% was deposited in the State General Fund and the 14% from the surcharge was deposited in the Mass Transportation Operating Assistance Fund.1 Banking Corporations doing business in the MCTD also pay the Metropolitan Commuter Transportation Mobility Tax imposed at a rate of $0.34 for every $100 of payroll allocated to the District. The State distributes all proceeds from the Mobility Tax to the MTA. 11.2 The NYS Bank Franchise Taxpayer The NYS Bank Tax is imposed on domestic commercial banks, savings banks, savings and loan associations and foreign/alien banks2 for the privilege of doing banking business in the State.3

Banking business is defined as the business activity which a corporation or association may be created to do under various provision of NYS or Federal banking laws and generally includes making loans and obtaining funds, primarily by accepting deposits. Banking business may also include activities carried on in offices that are not banks or branches, such as loan production offices.

Effective TY2008, the Bank Tax is also imposed on banks with credit card operations in NYS that exceed 1,000 customers/merchants or $1 million in receipts from customers/merchants.

Fewer than 800 taxpayers file Bank Tax returns.4 Clearinghouse5 and commercial banking institutions accounted for 66.3% of total Bank Tax liability in 2006, alien banking institutions for 23.7% and foreign banking institutions, savings banks and savings/loan institutions, 10%.6

Taxpayer Reporting. Every corporation subject to the NYS Bank Tax must file an annual tax return reporting its income and capital. A banking corporation that is a member of an affiliated group of corporations may file on a separate return basis or on a combined return basis.

Under separate entity reporting, a corporation with sufficient nexus – the tax law term for connection – with NYC is required to file its own Bank Tax return

Under combined reporting, an affiliated group of taxpayers meeting certain capital stock ownership and unitary business tests7 file combined reports if filing on a separate basis would distort the activities, business, income or capital of the taxpayers. Combined reporting requires that companies combine profits and losses from all related subsidiaries including those located in other states.

A banking corporation may be required to file a combined return with other corporations under certain circumstance. The factors determining which companies are to be included in a combined return are ownership, inter-corporate transactions, and the extent of related activities. Foreign banks organized outside the United States may not be included in a combined return with U.S. banks.

Effective TY2008, income from Captive Real Estate Investment Trusts (REITs) and Captive Regulated Investment Companies (RICs)8 must be included in a combined Bank Tax return if the business owning them is subject to the tax.

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11.3 The NYS Bank Franchise Tax Base

The Bank Tax is calculated by the taxpayer using four methods and is paid on the method which produces the highest tax.

Entire net income (ENI) base – a tax rate of 7.1% is imposed on net income allocated to NYS.

Alternative tax base – a 3% minimum tax is imposed on entire net income adjusted to reflect certain tax preference items.

Assets base – a tax is imposed at the rate of 1/10, 1/25, or 1/50 of a mill of taxable assets allocated to NYS depending on the size of net worth relative to assets and mortgages as a percent of total assets.

A fixed dollar minimum tax of $250 is imposed.

Entire Net Income. Entire net income (ENI) is defined differently for U.S. banks and for non-U.S. (alien) banks.

For U.S. banks, ENI is equivalent to taxable income for Federal tax purposes with certain NYS add-backs and subtractions. Banks are allowed a net operating loss (NOL) deduction, subject to certain restrictions.

For alien banks, entire net income is income effectively connected with the conduct of trade or business within the U.S. subject to certain modifications. These include add-backs of dividends or interest income and income excluded from Federal taxable income resulting from tax treaties between the U.S. and the home country of the corporation.

Allocating Income. Multistate banking corporations earning their income in several states must allocate their income using what is called in NYS an allocation formula and elsewhere an apportionment formula.

In NYS, prior to 2006 all banking corporations used a 3-factor formula to allocate income. The allocation was based on the share of total bank receipts, total bank deposits and total bank payroll located in NYS. The allocation formula included 80% of the corporation’s payroll, excluded

executive officers’ salaries and doubled weighted the receipts factor.

From 2006 to 2008, NYS phased in a new single-factor allocation formula based solely on receipts for banking corporations that provided management, administrative or distribution services to regulated investment companies. For all other banking corporations, the three-factor formula, with its double weighted receipts factor, still applies.

11.4 Trends in NYS Bank Franchise Tax Revenues

Current dollar Bank Tax revenues pictured in Figure 11.1 more than doubled from FY2000 to FY2010. In constant dollars, they increased by 74%.

Figure 11.2 shows that Bank Tax revenues are extremely volatile, with annual changes having little, if any, relationship to fluctuations in the State economy. Bank Tax revenues may have little relationship to bank tax liabilities in any given year due to the timing of tax payments, the carry forward of prior year credits/losses and the reconciliation of prior year liabilities. 11.5 History of the NYS Bank Franchise Tax

Prior to 1973, NYS and nationally chartered banks were taxed under different parts of the State Tax Law (9B and 9C). In 1973, the State consolidated both types of banks under Article 32. The new tax brought the NYS Bank Tax in conformity with the Federal tax code, with some modifications. Major legislative changes to the tax since 1980 are summarized in Exhibit 11.1.

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11.6 The Bank Franchise Tax in NYS Local Jurisdictions NYC is the only local government in the State with statutory authority to levy a tax on banking corporations. The NYC Bank Tax is imposed on corporations for the privilege of doing a banking business in the City.

Several types of corporations conduct a banking business in NYC including commercial and savings banks, savings and loan associations, bank holding companies, trust companies and certain subsidiaries of banks owned by a bank/bank holding company.

Effective Tax Year 2011, credit card issuing companies with at least 1,000 customers /merchants having a mailing address in NYC will be subject to the Bank Tax, regardless of whether the banks have a physical presence in the City.

11.7 Bank Taxes in Other States

Some states levy a specific tax on banks; others tax banks as part of their general corporation tax (see Exhibit 11.1). NYS is one of a few states that permits certain local governments to impose a tax on banks.

11.8 Issues and Concerns Differential Taxation of Banks and Other Financial Institutions. The difference between banks and other financial institutions is less distinct as a result of the Federal Gramm-Leach-

Bliley Act (GLBA) which was signed into law in 1999. GLBA repealed the core provisions of the Glass-Steagall Act and the Bank Holding Company Act that restricted bank holding companies from affiliating with securities firms and insurance companies. GLBA also permits bank subsidiaries to engage in some non-banking activities.

For NYS tax purposes, these changes have blurred the line between businesses that have to file under the Bank Tax and those that have to file under the 9A Corporate Franchise Tax. As a result, NYS is considering the creation of a single tax structure for financial institutions. A proposal prepared by the State has been forwarded to the industry for review and comment. The recently enacted Federal Dodd-Frank Wall Street Reform and Consumer Protection Act changes the regulatory environment for financial institutions and rein- forces the importance of restructuring the State’s taxation of banks and other financial institutions.

Credit Card Company Taxation. Credit card companies sited outside of NYS but with a large clientele with NYS addresses will experience a substantial increase in their Bank Tax liability as a result of recent changes to the tax law. The imposition by NYC of a similar law makes it even more expensive for credit card companies with a large NYC resident clientele. Combined Reporting. Certain bank taxpayers must file on a combined basis which requires that they combine profits and losses from all related subsidiaries before determining what portion of their profits are taxable by NYS. In implementing the rules related to combined reporting, the State has to address several complicated issues such as (1) defining which members comprise the group for combined reporting; (2) deciding how to combine the group’s income and how to treat inter-company transactions, net operating losses, credits and deductions as well as non-business income; and 3) how to apportion income among the combined entities.

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Endnotes

1 Based on estimates for 2010 published in 2010-11 NYS Executive Budget, Economic and Revenue Outlook, p. 261. http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 2 Foreign banks are chartered in a state other than NYS; alien banks outside the U.S. 3Banks subject to the tax include national banks and production credit associations located in New York and on the following corporations organized under the laws of New York: banks, savings banks, savings and loan associations, trust companies, subsidiary trust companies and other financial corporations including foreign banking corporations and other foreign financial corporations, federal savings banks and federal loan associations 4 Economic and Revenue Outlook, Op.cit, p.267 5The term clearing house refers to a bank or other financial institution that helps to transfer funds from one bank to another. 6 Economic and Revenue Outlook, Op. cit. p.269 7A unitary business is one in which there is a sharing or exchange of value between members of the group as demonstrated by: (1) centralized management/ common executive force; (2) centralized administrative services/functions resulting in economies of scale; or (3) flow of goods, capital resources or services demonstrating functional integration. 8A captive REIT/RIC is not regularly traded on an established securities market and more than 50% of its voting stock is owned or controlled by a single corporation that is not exempt from Federal income taxation and is not a REIT.

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Exhibit 11.1: State Income Tax Rates on Financial Institutions , 2010

State Rate State Rate State Rate Alabama 6.5% * Kentucky 4.0-6.0 * North Dakota 7.0 Alaska 1.0-9.4 * Louisiana 4.0-8.0 * Ohio a Arizona 6.968 * Maine 1.0 Oklahoma 6.0 * Arkansas 1.0 - 6.5 * Maryland 8.25 * Oregon 6.6-7.9 California 10.84 Massachusetts 10.0 Pennsylvania 9.99* Colorado 4.63* Michigan 4.95 * Rhode Island 9.0 * Connecticut 7.5 * Minnesota 9.8 * South Carolina 4.5 Delaware 8.7 - 1.7 Mississippi 3.0- 5.0 * South Dakota 6.0 - 0.25 Florida 5.5 * Missouri 7.0 Tennessee 6.5 * Georgia 6.0 * Montana 6.75 * Texas b Hawaii 7.92 Nebraska 5.58-7.81* Utah 5.0 * Idaho 7.6 * New Hampshire 8.5 * Vermont 6.0-8.5 * Illinois 7.3 * New Jersey 9.0 * Virginia 6.0 * Indiana 8.5 * New Mexico 4.8 - 7.6 * West Virginia 8.5 * Iowa 5.0 New York 7.1* Wisconsin 7.9 * Kansas 2.25% North Carolina 6.9 %* Dist. of Columbia 9.975*

Note: Local government taxes not included. * Same as State Corporate Income tax a Ohio has replaced its corporate tax with a gross receipts tax. b Texas imposes a Franchise Tax Source: Federation of Tax Administrators, Range of State Corporate Income Tax Rates. Exhibit 11.2: Major NYS Legislative Actions Affecting the NYS Bank Tax, 1980-2010

Year Action

1981 Temporary 18% surcharge imposed on tax liability attributable to business activity in the Metropolitan Commuter Transportation District (MCTD). Rate reduced to 17% in 1982.

1985 Bank Tax Reform of 1985 enacted. Tax rates reduced for EIN basis from 12% to 9%. Uniform treatment of thrifts and commercial banks provided for.

1987 Business Tax Reform and Rate Reduction Act of 1987 reduced tax rates and restructured alternative basis to include a broader range of taxable income items.

1997

17% surcharge extended for 4 years. Banks permitted to claim a net operating loss deduction (NOLD) for losses occurred after 1/1/2001 to be carried forward for 15 years. Conformed the treatment of New York S corporations to the treatment of federal Subchapter S corporations and allowed certain banks to elect New York S corporation status. Authorized the formation of limited liability trust companies subject to certain restrictions. Limited liability trust companies to be taxed as partnerships.

1999 Reduced the Earned Net Income (ENI) tax rate from 9% to 7.5% over three years.

2003 1985 and 1987 Bank Tax reforms extended until 2005. Graham-Leach-Bliley provisions allowing combined reporting for bank and financial holding companies extended until 2004.

2005 Changed the computation used to allocate income and assets by Article 32 banking corporations from a three-factor formula to a single receipts factor for certain banks.

2006 Extended provisions relating to 1985 Bank Tax Reform through 2008. Extended transitional provisions with respect to Gramm-Leach Bliley Act through January 1, 2008.

2007 Lowered the rate imposed on the ENI base from 7.5% to 7.1%.

2008 Imposed the bank tax on banks with credit card operations in NY State that exceed 1,000 customers or $1 million in receipts. Decoupled NY State from the Internal Revenue Code and required taxpayers to add back the qualified production activities income deduction when computing NY taxable income. Extended the 17% surcharge another four years to 2013.

2010 Extended major provisions of the 1985 and 1987 bank tax reforms for another year. Extended transitional provisions in NYS bank tax enacted in response to the Gramm-Leach-Bliley Act.


Petroleum Business Tax

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12.0 PETROLEUM BUSINESS TAX 12.1 Overview New York State adopted the Petroleum Business Tax (PBT) under Article 13-A of the State Tax Law in 1983 imposing the tax on petroleum businesses for the privilege of operating in the State. The PBT, which under NYS law must be passed along to the final consumer, is imposed on petroleum companies in addition to the 9A Corporate Franchise Tax. Article 13-A also imposes the Petroleum Business Carrier Tax on motor carriers for fuel purchased outside NYS but use within it. It is a complement to the NYS Fuel Use Tax discussed in Section 6 and collected from motor carriers with it. For collection purposes, no distinction is made between the two taxes. In FY2010, the PBT generated $1.1 billion, accounting for 1.9% of NYS tax revenues and 0.9% of all State revenues. Of the $1.1 billion, 50.6% was deposited in the Dedicated Highway and Bridge Trust Fund, 29.7% in the Dedicated Mass Transportation Trust Fund and 19.7% in the Metropolitan Transportation Operating Assistance Fund.1 12.2 The NYS Petroleum Business Taxpayer The PBT is paid at different points in the distribution chain depending on the product.

Motor fuel (gasoline) is subject to tax upon importation into or production in NYS – the initial point in the distribution chain;

Automotive diesel motor fuel is taxed at the point of the first non-exempt sale/use of the product in NYS;

Non-automotive diesel fuel and residual petroleum products are taxed at the point of final sale/use of the product in NYS; and

Jet fuel is taxed on the quantity of fuel burned during take-off from a NYS airport.

Major exemptions to the PBT include:

Kerosene other than certain jet fuel,

crude oil, liquefied petroleum gas (LPG) and bunker fuel;

Unenhanced diesel motor fuel/residual petroleum products used/consumed in the production of tangible personal property;

Fuel used for residential and not-for-profit organization heating purposes;

Fuel sold to governments; Diesel motor fuel and residual petroleum

product for farm use; Sales for export from NYS; and Compressed Natural Gas

12.3 The NYS Petroleum Business Tax Base The PBT has two components: a base tax with rates that vary by product type plus a fixed supplemental tax. For example, in 2010, the 16.3 cents/gallon tax was the sum of the 9.8 cents/gallon basic tax and the 6.5 cents/gallon supplemental tax.2 The Petroleum Business Carrier Tax. The Carrier Tax rate is equal to the prevailing PBT rate for motor fuel/diesel fuel. 12.4 Trends in NYS Petroleum Business Tax Revenues In FY2010, current dollar Petroleum Business Tax revenues pictured in Figure 12.1 were up almost 10% over FY 2000; in constant dollars, revenues were down by 15%.

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The revenue increases in the early 1990s shown in Figure 12.2 reflect the change to a fixed cents/gallon tax in 1990 and the introduction of both the supplemental tax on petroleum businesses and the Petroleum Business Carrier Tax in 1991. Since then, constant dollar revenues from the tax have remained relatively stable.

12.5 History of the NYS Petroleum Business Tax Article 13-A was adopted in 1983 to replace the Article 9 tax on oil companies. Major changes to the Petroleum Business Tax since then are summarized in Exhibit 12.1.

12.6 The Petroleum Business Tax in NYS Local Jurisdictions No local government in NYS has legislative authority to impose a Petroleum Business Tax. 12.7 Taxes on Petroleum Companies in Other States Three states in addition to NYS currently impose either a gross receipts tax or a business tax specifically on petroleum companies: New Jersey, Connecticut and Pennsylvania. The State of Washington suspended its Petroleum Products Tax effective April 2010. 12.8 Issues and Concerns Unique Tax. New York is one of four states to impose a specific tax on petroleum companies. Tax Transparency. The Petroleum Business Tax is a complement to other NYS taxes and collected with them. This administrative procedure makes the tax non-transparent for consumers. Endnotes 1 Based on estimates for 2010 published in 2010-11 NYS Executive Budget, Economic and Revenue Outlook, p. 313 http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 2The base tax and the supplemental tax are indexed on the first day of January each year to reflect the change in the producer price index (PPI) for refined petroleum products for the preceding year ending August 31. The change is capped at 5%/year. State rate-rounding rules do not allow the rates to exceed the 5% cap limits.

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Exhibit 12.1: Major NYS Legislative Actions Affecting the NYS Petroleum Business Tax, 1980-2010

Year Action

1983 Article 9 taxes on oil companies repealed and replaced by Article 13-A tax on petroleum businesses. Tax imposed on gross receipts at a rate of 3.25%.

1990 Tax changed from gross receipts basis to cents/per/gallon basis to vary with type of product. Provided for annual indexation of tax rate and for joint administration of the tax with the Motor Fuel Excise Tax.

1991 Added supplemental tax of 4.5 cents/gallon applicable to most products. Added Petroleum Business Carrier Tax, a use tax on fuel purchased outside NYS for use within it.

1994 Provided for tax rate indexing.

1996 Eliminated tax on non-automotive diesel motor fuel used in manufacturing. Increased basic credit on residual petroleum products or diesel fuel for utility companies. Reduced tax on automotive diesel fuel component.

1999 Reduced tax on oil used for space heating. Reimbursement provided for the PBT on fuels used for mining and extraction.

2000 Minimum taxes on petroleum business and aviation fuel businesses under the PBT eliminated. Tax on fuel for space heating reduced.

2005 Required collection of taxes on sales made on NYS reservations to non-Native Americans.

2006 Full tax exemption provided for diesel motor fuel and residual petroleum products used for heating purposes. Full exemption provided from excise tax, PBT and State and local sales taxes for alternative fuels for motor vehicles.

Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget. Economic and Revenue Outlook.

Real Estate Transfer Tax

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13.0 REAL ESTATE TRANSFER TAX

13.1 Overview New York State adopted the Real Estate Transfer Tax (RETT) in 1968 under Article 31 of the State Tax Law. In FY2010, the tax generated $493 million, accounting for 0.85% of NYS tax revenues and 0.39% of total State revenues. Of the $493 million, 44% was deposited in the Environmental Protection Fund and 56% in the Clean Water/Clean Air Bond Debt Service Fund.1

13.2 The NYS Real Estate Transfer Taxpayer The NYS Real Estate Transfer Tax (RETT) applies to the transfer of any interest in real property, including a deed, where the considera- ation is greater than $500 with few exceptions.

Transactions excluded from the RETT are:

Property transfers to NYS agencies, subdivisions, and public corporations;

Property transfers to Federal agencies as well as transfers to the UN or any other international organization of which the U.S. is a member;

Certain other property transfers such as those given solely as security for a debt.2

The RETT also applies to (1) transfers of economic interests such as shares in co-op apartments; (2) long-term leaseholds and (3) the sale or transfer of at least a 50% ownership interest in a corporation, partnership, trust or other entity that owns/leases real property. An additional 1% tax – referred to as the mansion tax – is levied on transfers of 1-3 family houses and individual residential co-ops/condo units with a purchase price of $1 million or more. The RETT is generally payable by the seller. If the seller does not pay or is exempt from the tax,

the buyer must pay it. The 1% mansion tax is payable by the buyer. If the buyer is exempt, the seller is liable for the tax. 13.3 The NYS Real Estate Transfer Tax Base The RETT tax is imposed on real property transfers in NYS at a rate of $2.00/$500 of the consideration paid/required to be paid for the real property.3 The tax rate is reduced by 50% for qualifying transfers of real property to, or acquisition of, real property by a real estate investment trust (REIT) upon its initial formation or to an existing REIT formed before September 1, 2011. 13.4 Trends in New York State RETT Revenues In current dollars, RETT revenues pictured in Figure 13.1 increased by 38% from FY 2000 to FY2010. In constant dollars, FY2010 revenues were 8% below those in FY2000 and more than 50% below the peak reached in FY2007.

The acceleration in RETT revenue between 2002 and 2007 shown in Figure 13.2 reflects the increase in housing prices and the large number of commercial property sales during the five-years, especially in NYC.

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13.5 History of the NYS Real Estate Transfer Tax When NYS initially imposed the RETT in 1968, the tax rate was set at $0.55/$500 on considerations greater than $100. Major legislative changes since 1980 are shown in Exhibit 13.1. 13.6 Taxes on Real Estate Transfers in NYS Local Jurisdictions The NYS Real Estate Transfer Tax is levied in addition to real estate transfer taxes imposed by NYC and 8 other jurisdictions in the State (see Exhibit 13.2). 13.7 Real Property Transfer Taxes in Other States Thirty-eight states and/or one or more of their local jurisdictions impose some type of tax/fee on real property transfers (see Exhibit 13.3). 13.8 Issues and Concerns High Taxes. The combined NYC/NYS property transfer tax rate on properties sold at $1 million or more is the highest imposed in the U.S. For all other properties, the combined rate is higher than the rate imposed anywhere in the U.S. with the exception of a few jurisdictions in Pennsylvania.

Endnotes 1 Based on estimates for 2010 published in 2010-11 NYS Executive Budget, Economic and Revenue Outlook, p.329 http://publications.budget.state. ny.us/eBudget1011/economicRevenueOutlook/economic RevenueOutlook.pdf 2Also includes transfers without consideration, transfers in connection with a tax sale, transfers to effect a change of identity or form of ownership where there is no change of beneficial ownership, conveyances under the Federal bankruptcy act, and certain options and contracts to purchase the real property. 3For one/two/three-family houses and individual residential condominium units, or where the consideration is less than $500,000, the consideration for the interest conveyed excludes the value of any lien/encumbrance remaining on the property at the time of conveyance.

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Exhibit 13.1: Major NYS Legislative Actions Affecting the NYS Real Estate Transfer Tax, 1980-2010 Year Action

1983

Tax rate increased from $0.55/$500 to $2.00/$500. Definition of consideration changed to include mortgages/liens/encumbrances which existed before and remained after the delivery of the deed. Remaining liens/encumbrances for one, two/three family homes, residential condominiums or interests/transfers where the value of the consideration is below $500,000 exempted from the definition of consideration.

1989

Scope of tax broadened to capture the sale of an economic interest in real property including the sale or acquisition of a controlling interest in real property. Tax expanded to treat the transfer of a residential cooperative apartment in the same manner as residential homes or condominiums. A 1% Mansion Tax imposed requiring that the buyer pay the tax on the sale of residential property over $1 million in value unlike the base tax which is paid by the seller.

1993 A portion of the Transfer Tax dedicated to the newly created Environmental Protection Fund. 1994 Tax rate reduced by 50% on transfers made by REITs pursuant to the formation of the trust. 1999 Extended the 50% tax rate reduction on REIT transfers. 2000 Extended the 50% tax rate reduction on REIT transfers until 9/1/05. 2006 Extended the 50% tax rate reduction on REIT transfers until 9/1/08. 2008 Extended the 50% tax rate reduction on REIT transfers until 9/1/11. 2009 Reduced the proportion of tax receipts dedicated to the Environmental Protection Fund.


Exhibit 13.2: Real Estate Transfer Taxes in NYS Local Jurisdictions, 2010 Jurisdiction Tax Payer Erie County $ 5/ $1,000 of consideration Seller Broome County $ 0.50/ $500 of consideration Seller Columbia County $1/$500 of consideration Seller Essex County $1/$500 of consideration Seller Tompkins County $1/ $500 of consideration Seller Towns in the Peconic Bay Region (Suffolk County) 2.0% of consideration Buyer Town of Red Hook (Dutchess County) 2.0% of consideration Buyer Town of Warwick (Orange County) 0.75% of consideration Buyer Source: NYS Department of Taxation and Finance, Handbook of New York State and Local Taxes, October 2010, p. 38.

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Exhibit 13.3: State Real Estate Transfer Taxes , 2010* State Tax Description State Tax Description

Deeds $0.50/$500 Alabama Mortgages $0.15/$100

Montana None

Alaska None Nebraska $2.25/$1,000 $0.65-$1.25/$500 Arizona $2 fee/deed or contract Nevada $1.30/$500 county tax

Arkansas $3.30/$1,000 New Hampshire

$0.75/$100

State: 0.4% - 1.21% + $5/$500 surtax on residences over $1 million; 1% fee on commercial sales over $1 million.

California $0.55/$500 local option New Jersey

Counties: Up to 0.1% additional tax Colorado $0.01/$100 New Mexico None

State: $2/$500 up to $1 million; 1% additional over $1 million Counties: Varying rates

Connecticut Residential 0.5% or 1.0%; Nonresidential 1.0%; Municipal tax 0.11%-0.36%

New York

NYC: 1% -2.625% $1/$500 Delaware 2% tax if no local transfer tax; 1.5% max if local

transfer tax North Carolina Local option to increase by up to 0.4%

Florida $0.70/$100 (0.6% if county surtax) North Dakota

None

$0.10/$100 Georgia

$0.1/$100

Ohio Local option $0.30/$100

Oklahoma Deed stamp tax $0.75/$500 Hawaii $0.1 to $1/$100 based on property value. $0.15 to $1.25/$100 without homeowner exemption. Oregon None

State: Documentary Stamp Tax 1.0% Phila. 3.0% Pitts. 1.5%-2.0%

Idaho None Pennsylvania

Counties Varying rates State $0.50/$500 Counties $0.25/$500

Illinois

Chicago $5.25/$500

Rhode Island

Realty conveyance tax $2.00/$500

$1.85/$500 Deed recording fee Indiana None South Carolina ($1.30 State, $0.55 county)

Iowa $0.80/$500 South Dakota

$0.50/$500

$0.37/$100 Kansas $0.26/$100 mortgage fee Tennessee Mortgage tax $0.115 /$100

Kentucky $0.50/$500 Texas None Louisiana None Utah None Maine $2.20/$500 Vermont 1.25% + capital gains tax on land sales, based

on time of ownership 0.25% - 0.5% Maryland Variable county tax

Virginia $0.50/$500

$4.56/$1,000 Massachusetts $10-$20 document fee

Washington Real property sale excise tax 1.28% of sales price + 0.25%-0.75% local option tax

State $3.75/$500 Michigan County $0.55/$500-$0.75/$500

West Virginia

$1.65/$500 + $0.55 local option. Plus $20 flat fee.

Minnesota $1.65/$500 Deed Tax Wisconsin $0.30/$100 Mississippi None Wyoming None Missouri None District of

Columbia 1.1%

Source: National Conference of State Legislators, August 2010.

Estate Tax

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14.0 ESTATE TAX 14.1 Overview New York State has imposed the Estate Tax under Article 26 of the State Tax Law since 1963 on the transfer of the taxable estates of deceased persons; it has imposed some type of similar tax since 1885. In FY2010, the Estate Tax generated $866 million, accounting for 1.5% of NYS tax collections and 0.7% of total State revenues.1 All revenue collected from the Estate Tax is deposited in the NYS General Fund. 14.2 The NYS Estate Taxpayer

If the estate is passing to someone other than the surviving spouse or a charitable trust, the Estate Tax is imposed depending upon the last residence of the deceased.

If the deceased was a NYS resident, the estate is subject to the State Estate Tax if the total of the Federal Gross Estate (described below) plus Federal adjusted taxable gifts and the value of the specific exemption is greater than $1 million. The specific exemption is the amount of the estate excluded from calculating estate taxes owed at the Federal level. It is currently set at $5 million per person.

If the deceased was a non-resident U.S. citizen, the estate is subject to the NYS Estate Tax if it includes real estate or tangible personal property located in NYS and the Federal Gross Estate plus Federal adjusted taxable gifts and the specific exemption exceeds $1 million. There is reciprocity with other states with respect to the collection of non-resident estate taxes.

If the deceased was a non-resident, non-U.S. citizen, the estate is subject to the NYS Estate Tax if it includes real or tangible personal property located in NYS and a Federal Estate Tax return must be filed.

Distribution of Estate Tax Payments. A size- able component of NYS Estate Tax payments comes from relatively few large estates. In 2001-2002, the 21 estates paying $4 million or more

accounted for 32% of total Estate Tax payments; in 2007-2008, the 31 largest estates accounted for 37% of total payments (see Exhibit 14.3).

14.3 The NYS Estate Tax Base The starting point for calculating the NYS Estate Tax is the value of the gross estate of the deceased using Federal Estate Tax provisions. The Federal Gross Estate is the sum of the cash, real estate, stocks/bonds, life insurance and other assets owned by the deceased. The Federal Gross Estate is reduced by several deductions including bequests to the surviving spouse, charitable contributions and similar gifts. For certain estates, it is also reduced by the Qualified Conservation Easement Exclusion.2

For estates liable for the NYS Estate Tax, the Federal Gross Estate may be further reduced by the Qualified Family Owned Business Interest deduction.3

NYS Estate Tax. NYS tax liability is equal to the lesser of (1) the net Federal Estate Tax or (2) the value of the Credit for State Death Taxes that existed in Federal law on July 22, 1998.

Net Federal Estate Tax. Adjusted taxable gifts are added to the Federal Gross Estate – reduced by the deductions described above – to yield the base for determining the tentative Federal tax for purposes of the NYS Estate Tax. The tax rates for calculating the tentative Federal Tax are provided in the Unified Rate Schedule in the NYS Estate Tax form4 (see Exhibit 14.1). Once the tentative Federal Tax is calculated, the Federal gift tax payable and the maximum NYS Unified Credit – which cannot be more than $345,800 – are subtracted to derive the net Federal Estate Tax.

The maximum NYS Unified Credit of $345,800 effectively eliminates the NYS Estate Tax on estates valued at under $1 million.

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Credit for State Death Tax. Effective February 2000, the NYS Estate Tax was limited to the maximum amount allowed as a credit for state death taxes on the Federal Estate Tax return.

This kind of estate tax is known as a pickup tax because it picks up the portion of the Federal estate tax that would otherwise be paid to the Federal government if the state tax were not imposed.

In 2001, the Federal Economic Growth and Tax Relief Reconciliation Act repealed the credit for state estate taxes that could be taken on the Federal Estate Tax return. NYS was not affected by this change, however, since it had amended the State Estate Tax law to conform to Federal Estate Tax laws in effect on July 22, 1998.

The current NYS Credit for State Death Taxes is calculated using a graduated schedule provided in the NYS Estate Tax return.5 Rates range from 0.8% up to 16% depending on the taxable value of the estate (see Exhibit 14.2).

If estate property is located outside of NYS, an allocation percentage is applied to prorate the tax.

14.4 Trends in NYS Estate Tax Revenues From FY2000 to FY2010, Estate Tax revenues pictured in Figure 14.1 declined by 18.1% in current dollars and by 38.3% in constant dollars.

The annual fluctuations in Estate Tax revenues shown in Figure 14.2 are mainly due to differen-

ces in taxpayer mortality and changes in asset valuations across years.

14.5 History of the NYS Estate Tax NYS inheritance taxation began in 1885 as a tax on certain heirs. It was extended in 1891 and superseded in 1930 by an Estate Tax imposed under Article 10-C of the NYS Tax Law. In 1963, the State adopted its current tax, which is based on Estate Tax provisions of the Federal Internal Revenue Code, with certain modifications for NYS tax purposes. Major changes to the NYS Estate Tax since 1980 are summarized in Exhibit 14.4.

14.6 The Estate Tax in New York State Local Jurisdictions No local jurisdiction in NYS has the authority to impose an estate tax. 14.7 The Estate Tax in Other States In 2010, 17 states and the District of Columbia imposed a state estate tax (see Exhibit 14.5). Seven more states impose an inheritance tax on individual beneficiaries rather than on the value of the entire estate.6 In all states, transfers of assets to a surviving spouse are exempt from estate and inheritance taxes. In some states, transfers to children and other close relatives are also exempt.

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14.8 Issues and Concerns High Tax Rates. High Estate Tax rates in NYS may be a reason for older high-income persons to relocate to states with no estate taxes. Transparency. The NYS Estate Tax is complicated and difficult to understand. Language in the instructions and on the tax form is opaque and confusing. Conformity with Federal Law. As discussed in Section 14.3, the current NYS Estate Tax is based on the Federal death tax credit for states as it existed on July 22, 1998. The reduction of the Federal Estate Tax to zero in 2010 and the recent reinstatement of the tax did not impact the NYS Estate Tax since it conforms to Federal Estate Tax laws in effect on July 22, 1998.

Endnotes

1 These revenues include a small portion of receipts from NYS Gift Tax payments. Although the Gift Tax was repealed in 2000, some money is still collected for periods prior to the repeal. 2 The gross estate of a decedent can exclude from the Federal Estate Tax return the value of a conservation easement granted by a decedent on real property (e.g., open space easement) to the Federal, state or local governments up to a maximum of $500,000. 3 This allows for the deduction of the value of a Qualified Family Owned Business Interest. The maximum amount of this deduction is $675,000. This credit has been eliminated from Federal Tax calculation but is still allowed in NYS. 4 See NYS Estate Tax Return ET 706, 2010, p. 4. 5 Ibid. 6 Indiana, Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania.

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Exhibit 14.1: Unified Rate Schedule for Calculation of the NYS Estate Tax, 2010 If the Taxable Amount Is: The Tax Is:

Over But Not Over $0 $10,000 18% of the taxable amount 10,000 20,000 $1,800 plus 20% of the amount over $10,000 20,000 40,000 3,800 plus 22% of the amount over 20,000 40,000 60,000 8,200 plus 24% of the amount over 40,000 60,000 80,000 1,300 plus 26% of the amount over 60,000 80,000 100,000 18,200 plus 28% of the amount over 80,000 100,000 150,000 23,800 plus 30% of the amount over 100,000 150,000 250,000 38,800 plus 32% of the amount over 150,000 250,000 500,000 70,800 plus 34% of the amount over 250,000 500,000 750,000 155,800 plus 37% of the amount over 500,000 750,000 1,000,000 248,300 plus 39% of the amount over 750,000 1,000,000 1,250,000 345,800 plus 41% of the amount over 1,000,000 1,250,000 1,500,000 448,300 plus 43% of the amount over 1,250,000 1,500,000 2,000,000 555,800 plus 45% of the amount over 1,500,000 2,000,000 2,500,000 780,880 plus 49% of the amount over 2,000,000 2,500,000 3,000,000 1,025,800 plus 53% of the amount over 2,500,000 3,000,000 10,000,000 1,290,800 plus 55% of the amount over 3,000,000 10,000,000 17,184,000 5,140,800 plus 60% of the amount over 10,000,000 17,184,000 ------ 9,451,200 plus 55% of the amount over 17,184,000

Source: New York State Estate Tax Return ET 706, 2010, p. 4.

Exhibit 14.2: Rates for Computation of the Maximum Unified Credit for the NYS Estate Tax, 2010 Tax Base Over But Not Over Credit $40,000 $90,000 0.8% of amount over $40,000 90,000 140,000 1.6% of amount over 90,000 140,000 240,000 2.4% of amount over 140,000 240,000 440,000 3.2% of amount over 240,000 440,000 640,000 4.0% of amount over 440,000 640,000 840,000 4.8% of amount over 640,000 840,000 1,040,000 5.6% of amount over 840,000 1,040,000 1,540,000 6.4% of amount over 1,040,000 1,540,000 2,040,000 7.2% of amount over 1,540,000 2,040,000 2,540,000 8.0% of amount over 2,040,000 2,540,000 3,040,000 8.8% of amount over 2,540,000 3,040,000 3,540,000 9.6% of amount over 3,040,000 3,540,000 4,040,000 10.4% of amount over 3,540,000 4,040,000 5,040,000 11.2% of amount over 4,040,000 5,040,000 6,040,000 12.0% of amount over 5,040,000 6,040,000 7,040,000 12.8% of amount over 6,040,000 7,040,000 8,040,000 13.6% of amount over 7,040,000 8,040,000 9,040,000 14.4% of amount over 8,040,000 9,040,000 10,040,000 15.2% of amount over 9,040,000 10,040,000 -------- 16.0% of amount over 10,040,000

Source: New York State Estate Tax Return ET 706, 2010, p. 4.

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Exhibit 14.3: NYS Estate Tax Receipts by Size of Estate, 2001-2010 ($ in millions)

Year Super-Large1&Extra Large2

Estates Large Estates3 Small Estates4 Total Taxes

Number Taxes Number Taxes Taxes Taxes 2001-02 21 $240.1 167 $208.8 $312.5 $761.4 2002-03 16 190.5 200 247.6 262.8 700.9 2003-04 26 259.1 169 209.1 264.1 732.3 2004-05 25 377.9 191 212.9 304.5 895.3 2005-06 25 289.7 173 223.1 342.1 854.9 2006-07 28 389.5 217 267.8 406.0 1063.3 2007-08 31 280.9 264 318.3 437.5 1036.7 2008-09 30 418.9 246 297.4 445.9 1162.2 2009-10 23 220.2 197 236.4 407.4 864.0 1 - Payment of at least $25.0 million 2 - Payment of at least $4.0 million, but less than $25.0 million 3 - Payment of at least $.05 million, but less than $4.0 million 4 - Payment less than $.05 million

Source: Excerpted from 2010-11 NYS Executive Budget, Economic and Revenue Outlook, p. 314.

Exhibit 14.4: Major NYS Legislative Actions Affecting the Estate & Gift Tax, 1980-2010 Year Action 1982 Unified the Estate Tax and Gift Tax rates and credit.

1994 Increased the unified credit for Estate and Gift Tax from $2,750 to $2,950 effectively eliminating the tax on estates or gifts up to $115,000.

1995 Authorized principal residence deduction of $250,000.

1997 Set the State’s unified credit to equal the Federal credit, but capped the maximum credit to exempt the first $1,000,000 of the estate. Repealed Gift Tax effective 2000.

1999 Family-owned business exclusion repealed and replaced by family-owned business deduction. NYS Estate Tax (except for unified credit provisions) conformed to Federal law.

2010 NYS unified credit set to provide a $1,000,000 exemption level independent of the Federal Credit. Sources: Unpublished information supplied to author by NYS Assembly Ways & Means Committee. 2010-11 NYS Executive Budget, Economic and Revenue Outlook.

Exhibit 14.5: State Estate Taxes and Exemptions, 2010 State Exemption* Connecticut $3,500,000 Delaware $3,500,000 Hawaii $3,600,000 Illinois** $2,000,000 Maine $1,000,000 Maryland $1,000,000 Massachusetts $1,000,000 Minnesota $1,000,000 New Jersey $675,000 New York $1,000,000 North Carolina $5,000,000 Ohio $338,333 Oregon $1,000,000 Rhode Island $850,000 Tennessee $1,000,000 Vermont $2,750,000 Washington $2,000,000 Dist. of Columbia $1,000,000

*Value below which estates are effectively exempt. **Illinois estate tax expired on January 1, 2010, but has been reinstated for the 2011 tax year with a $2 million exemption. Source: State Tax and Exemption Chart, 2009-2011 http://wills.about.com/od/stateestatetaxes/a/stateestatetaxchart.htm

Biographies

BIOGRAPHIES Dr. Marilyn Marks Rubin is a Professor of Public Administration and Economics at John Jay College of the City of New York where she teaches courses in Fiscal Policy, Economics and Research Methods and is Director of the College’s MPA Program. She has served as a consultant on fiscal policy, revenue forecasting, economic development and strategic planning for municipal, state and federal entities as well as Moody’s Investors Service, the United Nations and the Port Authority of New York and New Jersey. Dr. Rubin is currently a member of the Economic Advisory Board to the New York State Assembly Ways and Means Committee and the Property Tax Advisory Board to the New York City Department of Finance. She has authored several publications on fiscal policy and budget-related issues and has served as advisor to the Korean Women’s Development Institute on gender budgeting; the government of Thailand on performance evaluation; and in Ecuador under the Fulbright Senior Specialist Program where she worked to establish the country’s first MPA program. She has also been a visiting professor at a number of universities outside the U.S. A former Chairperson of The Association for Budgeting and Financial Management of the American Society for Public Administration, Dr. Rubin is a member of the editorial board of Public Budgeting and Finance. She is a fellow in the National Academy of Public Administration (NAPA) and winner of a Distinguished Research Award from the American Society for Public Administration. A graduate of Douglass College of Rutgers University with a B.A. in Economics, Dr. Rubin received both her M.A. in Economics and her Ph.D. in Public Administration from New York University. Peter J. Solomon is the Founder and Chairman of Peter J. Solomon Company, L.P. (PJSC). Established in 1989, the Firm provides investment banking services to corporations, including advice on mergers, acquisitions and divestitures, recapitalizations, refinancings, restructurings and private placements of debt. Previously, he was at Lehman Brothers and became a Managing Director in 1970. He left Lehman Brothers as Vice Chairman in 1989. From 1978 to 1980, Mr. Solomon was Deputy Mayor of Economic Policy and Development in New York City under Mayor Edward I. Koch. He was responsible for matters within New York City relating to taxes, energy, ports and foreign trade and investment as well as economic development. He was Mayor Koch’s principal advisor on economic matters as the City began its recovery from its financial crisis. In addition, Mr. Solomon served as Chairman of New York’s Health and Hospitals Corporation, managing 17 municipal hospitals. In 1980, under President Jimmy Carter, he was Counselor to the United States Treasury where he was responsible for formalization of the department’s industrial policy. He also had extensive involvement in economic policy matters ranging from tax policy to automobile trade. Mr. Solomon is currently a director and the principal shareholder of Monro Muffler/Brake Inc., a director of Zagat Survey LLC and has served on the boards of many public companies. He is a director and Chairman Emeritus of the Manhattan Theatre Club; a member of the Board of Overseers of Memorial Sloan-Kettering Cancer Center, a Trustee of the Federation of Jewish Philanthropies of New York City and the Lucius N. Littauer Foundation and a Director-at-Large of the Montana Land Reliance. He is also a Lifetime Honorary Trustee of the American Museum of Natural History. In addition, he serves on a number of advisory committees at Harvard University. Mr. Solomon writes extensively on public policy issues and conflicts on Wall Street and appears frequently on television. Mr. Solomon received his B.A. degree cum laude from Harvard College and a Masters degree in Business Administration from Harvard Business School.

A GUIDE TO NEW YORK STATE TAXES:History, Issues and Concerns

A Guide to New

York State Taxes: History, Issues and Concerns

Marilyn M. RubinFebruary 2011

A GUIDE TO NEW YORK STATE TAXES: History, Issues and ...

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