Cuomo Advised to End N.Y. Clothes Exemption to Help Poor

New York state should end a sales-tax exemption for less-expensive shoes and clothes to cover levy reductions for low- and middle-income residents and property owners, a panel recommended to Governor Andrew Cuomo.

Ending the exemption on clothing and footwear that costs less than $110 would raise $800 million a year, the commission said yesterday in a report to Cuomo. More revenue could be brought in by taxing additional items and some services, the panel said.

Changes should also be made in business levies, such as merging “badly outdated” bank- and corporate-franchise taxes, the commission said in the report. The panel called for a re-evaluation of 50 different credits aimed at spurring job growth and valued at $1.7 billion this year.

“Since being elected governor, my administration has focused on reversing New York’s negative tax reputation,” Cuomo said in a statement accompanying the report’s release.

New York ranked at the bottom among states in terms of tax climate in 2010, according to a report by the Tax Foundation, a nonprofit research group in Washington. It had the worst rating for business taxes headed into 2014, based on a comparison of corporate levies and those on property, individual income, retail sales and unemployment insurance costs.

Costly, Complex

“New York’s taxes are still too high and its tax code too complex, placing undue burdens on individuals and businesses,” said the commission, led by former state Comptroller Carl McCall and investment banker Peter Solomon.

Cuomo appointed the panel, called the New York State Tax Reform and Fairness Commission, last year with a mission to review the state’s tax code and propose ways to make it simpler, more efficient and more equitable. Their recommendations were supposed to be “revenue-neutral,” or not designed to change the amount that lands in state coffers.

New York exempts necessities such as less-expensive clothing, food and health-related products to shield consumers from the full burden of sales taxes, forgoing $3.2 billion in revenue. Such exemptions create a “highly inefficient” method of aiding lower-income families, according to the report. It said less than 30 percent of the benefit, or about $900 million, goes to households with annual income of less than $50,000.

The commission also said more than $800 million in additional relief could be funded by taxing services such as dry cleaning, by eliminating a gasoline tax cap that holds the rate at 8 cents a gallon and by applying the sales levy to tickets to movies, sporting events and Broadway shows.

Even Split

The panel recommended splitting the $800 million raised by ending some sales-tax exemptions evenly between relief for low-and middle-income families and property owners, according to the report. It said ending the gas tax cap would bring in $371 million a year in new revenue.

Based on concerns that the state reaches too deeply into families’ pockets, with its estate-tax exemption level capped at $1 million, the commission recommended increasing that threshold to $3 million to help reduce the incentive for residents to move to states such as Florida that don’t impose such taxes.

Raising the exemption to that level would prevent levies on almost three-quarters of all New York estates, reducing state revenue by $300 million, the commission said. Only New Jersey and Rhode Island have a lower threshold for estate-tax exemptions, out of the 17 that impose such levies, the report showed. The federal tax exemption is $5.25 million.

To pay for the change, New York should reinstate a gift tax and close a loophole that lets residents set up out-of-state trusts to avoid income levies.

Business Levies

On industry taxes, the commission proposed combining bank and corporate-franchise levies, so that general businesses and financial institutions aren’t treated differently. To cover the $130 million in forgone revenue that would result, the panel recommended repealing or modifying business credits, including one that subsidizes in-state film and television production.

Corporate tax credits benefit just 1 percent of businesses that pay levies, according to the report. Scaling back breaks and monitoring them to ensure promised job growth occurs may create enough savings to reduce the corporate tax rate, Solomon said yesterday in a telephone interview.

“The business community has a choice,” Solomon said. “They can satisfy 100 percent of corporations or they can satisfy 1 percent of corporations.”

The report showed the state could raise $180 million a year by ending or changing investment tax credits, including those for the financial-services industry. It said the state could get $150 million in new revenue by simplifying corporate audits.

The panel is one of two tax commissions appointed by Cuomo, a 55-year-old Democrat. The second, headed by McCall and former Republican Governor George Pataki, has been charged with suggesting ways to cut property and income taxes.

In 2011, Cuomo pushed through the legislature tax cuts for middle-income earners while raising them for wealthier residents.

To contact the reporter on this story: Martin Z. Braun in New York at mbraun6@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman at smerelman@bloomberg.net.

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