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Example Of How Exceptions To Rules Can Create Loopholes

Example Of How Exceptions To Rules Can Create Loopholes

A10093, Middle Class Tax Relief, introduced in New York on April 29, 2022, provides tax relief by removing overtime pay and tips from AGI. Overtime is working beyond 40 hours per week and likely means hourly workers rather than salaried ones.

While the intent might be good if aiming to help people who are seeking jobs with overtime to earn extra money to make ends meet, the reach (and the drop in tax revenue to the state) will be much broader than this.

The “justification” from the bill sponsor: “With inflation on the rise. The Middle Class is struggling. This Legislation would help lighten the load on Middle class families by suspending all sales tax on non exempt food items, no income tax on any work beyond a 41 hour work week and no tax on any tippable wages.”  (there doesn’t seem to be any sales tax aspect to A10093 though)

While aimed at the “middle class” there is no definition offered of that. This bill seems to help a high income earner working overtime or receiving tips for services rendered. Some employers might try to change some of a worker’s salary to tips (with customer assistance) to help their employees get a tax break (if this were to be enacted, which seems unlikely).

What would be better? Use existing rules, such as increasing the state’s earned income tax credit. That would help the group this sponsor seems to want to assist. Or reduce the tax rates for lower income taxpayers.

And think of the compliance issues that would accompany carrying out this proposal? Forms W-2 for New York would need to be modified or have an attachment that goes to the worker and the state showing how much overtime and tip income was earned.

So, a few principles of good tax policy are not satisfied here including equity, simplicity and transparency.

What do you think? Professor Annette Nellen.

Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

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