State Budget Hides Some ‘Tax’ Hikes
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

ALBANY — Although Governor Spitzer is claiming that his executive budget complies with his campaign promise not to raise taxes, New York banks, livestock farmers, investors, retailers, and well drillers will all be paying more money to the state under his new spending plan.
Mr. Spitzer is proposing a clampdown on an assortment of complicated tax loopholes that would allow the state to collect at least $449 million a year in additional tax revenue. He is also calling for higher fees that would cost New Yorkers millions of dollars.
The Spitzer administration argues that the extra revenue it’s collecting isn’t a tax increase but a way to correct unintended consequences in the tax code and pay for state services that go along with the fees. The additional revenue, administration officials say, helps Mr. Spitzer to pay for his marquee budget items — a surge in school aid and a property tax reduction plan — and still balance the budget.
New York business leaders, however, are wondering whether Mr. Spitzer’s pledge is a trick of semantics. “What a budget cruncher calls a loophole a business owner feels is a tax increase,” the president and CEO of the Business Council of New York State, Kenneth Adams, said. “At the end of the day, they are increased costs to important sectors to the state’s economy.”
Mr. Adams said that after Mr. Spitzer unveiled his budget Wednesday, “our phones started ringing immediately with calls from leaders in banking and finance affected by these so-called loophole closures.”
Some of the changes affect only a tiny percentage of the population and a narrow sector of the economy. Under Mr. Spitzer’s budget, it would now cost New Yorkers $90 more to register well-digging rigs, $8 more to search for criminal records in state databases, and $450 more to set up animal feeding operations with as few as 700 dairy cows. The governor is proposing legislation that would force the beverage industry to forgo tens of millions of dollars in unclaimed bottle deposits, which would be channeled into state funds.
The owner of Ace Well & Pump in Orange County near the New Jersey border, Carl Olinger, said he doesn’t mind the extra fees, saying the $10 fee he now pays to register his drilling rigs is “ridiculously low anyway.” He said the fee increase “is more in line, and I’m not complaining about it.” The proposed tax loophole closures are likely to face more resistance in the upcoming budget battle.
In an interview with The New York Sun, Mr. Spitzer’s budget director, Paul Francis, defined a tax loophole as a provision “used by a small group of sophisticated taxpayers in a way that the provision was never intended to reduce their tax liability.”
The governor is seeking to plug at least three loopholes, including one clever strategy that is being used by wealthy investors.
In New York, some investors are electing to be an S corporation at the federal level — a status that exempts the entity from paying corporate income taxes but passes profits and losses to shareholders — and a regular C corporation at the state level.
In New York, investment income of corporations is taxed based on the activity in the state of the company’s investment. So, for example, if you’re a corporation holding General Motors stock, the amount of dividend income you claim is the percentage of General Motors that’s in New York.
Unlike most C corporations, most of the money made by the investors is not coming from business activity but from investment income, which allows them to avoid paying a lot of personal income tax, according to budget officials. The original provision in the tax code “was a way keep corporate headquarters in New York, not a way to have wealthy individuals shelter investment income,” a state budget official, Robert Megna, said. The governor’s budget office is expecting to raise an additional $100 million in revenue by closing this loophole.
Mr. Spitzer is also seeking to end a tax avoidance strategy used by large retailers who lower their taxes simply by changing their configuration. Budget officials gave an example of an unnamed restaurant company headquartered in Iowa that expanded its New York market to eight restaurants from one but ended up paying less in taxes to New York after the expansion.
The company did this by defining itself as a company separate from the restaurants, which then funneled their income back to Iowa in the form of management fees. An article in yesterday’s Wall Street Journal explained how Wal-Mart Inc. employs a similar tactic by having its stores pay rent to a real estate investment trust owned by a Wal-Mart subsidiary.
Mr. Spitzer is requiring combined returns for subsidiaries that do more than half their business with a parent company, budget officials said. In the end, they expect to lasso another $215 million in taxes a year.
A third major loophole on the chopping block is one that would have its biggest impact on banks, which successfully lobbied the Legislature to block Governor Pataki’s attempt to eliminate it.
In New York, banks are exempt from paying taxes on 60% of dividend income from a subsidiary. The intention of the original tax law is to prevent taxable income earned by a subsidiary that flows back to the parent company from getting taxed twice, according to budget officials. Banks are using real estate investment trusts, which don’t have to pay corporate income taxes, to reduce their liability, taking advantage of the fact that 60% of the income flowing from the REITs to the banks is not taxed, according to budget officials.
By preventing banks from employing this strategy, the Spitzer administration expects to raise more than $100 million in additional taxes in the 2007-08 fiscal year.