A recently uncovered provision in President Trump’s spending bill has the potential to impose significant financial burdens on New York's top-earning firms, compelling them to pay billions of dollars in additional taxes each year. Experts warn that this could exacerbate the ongoing business exodus that has already severely impacted the city's and state’s finances.
Buried within Trump's extensive 1,100-page spending bill, which is primarily focused on federal tax cuts, is a one-sentence proposal aimed at limiting workarounds related to the SALT cap. This cap restricts state and local tax deductions and has been a contentious issue for taxpayers. The proposed amendment targets the pass-through entity tax (PTET), which currently allows New York service firms—including lawyers, accountants, doctors, dentists, and veterinarians—to benefit from approximately $16 billion in personal income tax deductions each year.
Tax experts interpret this move as a strategic attempt by GOP lawmakers to balance the proposed increase in SALT deduction limits. The Republican spending bill aims to raise the SALT deduction cap from $10,000 to $30,000 for individuals earning less than $431,000 annually. However, this change may not be sufficient to mitigate the financial impact on New York's high-earning firms, which often exceed this income threshold.
By limiting PTET, New York's leading accounting, finance, and law firms could face a tax increase of up to six percentage points, even with the proposed increase in SALT deductions. A former partner at a national CPA firm, who wished to remain anonymous, explained that while partnerships currently benefit from a reduced tax rate of about 4% through PTET, this relief could vanish, leading to a significant tax burden.
Bobbi Rebell, a personal finance expert, noted that this situation could serve as a final straw for firms contemplating relocation. Many of these top-earning businesses would not qualify for the new SALT cap, rendering the increase in deductions practically irrelevant. “It clobbers the real lucrative end, and New York’s tax base is more disproportionately reliant than ever on very high-earning individuals,” said EJ McMahon, a fellow at the Manhattan Institute for Policy Research.
The elimination of PTET could also adversely affect a range of smaller, locally-owned service businesses in New York. Experts suggest that while larger firms may find it feasible to relocate, smaller businesses, such as local accountants and lawyers, face greater challenges due to their established client bases in the city.
A former partner at a New York accounting firm commented, “It is a little bit harder for accountants and lawyers to pick up and move to Florida than it is for Wall Street professionals, since their clients are located in New York.” This dynamic illustrates the potential for a widening gap between larger firms that might relocate and smaller businesses that must endure the challenging environment.
In light of these developments, Trump has called on hesitant Republican lawmakers to rally behind his spending bill, though responses have been lukewarm. The White House has yet to respond to inquiries regarding the potential effects of the proposed changes. Meanwhile, the Association of International Certified Professional Accountants has mobilized its members, urging them to contact their Congressional representatives to oppose the termination of PTET.
The potential removal of PTET could also eliminate deductions for New York City’s 4% unincorporated business tax, compounding the financial strain on residents. New York’s finance and budget agencies have not yet commented on the situation.
Historically, during his first term in 2017, Trump enacted the Tax Cuts and Jobs Act, which capped SALT deductions at $10,000. The PTET was introduced as a workaround to this cap, allowing small corporations and partnerships to convert personal income tax into a business tax for substantial deductions. Following its approval by the IRS in 2020, PTET programs have proliferated, with at least 36 states adopting similar measures.
As a result of these tax policies, more than 125,000 New York City residents relocated to Florida between 2018 and 2022, taking with them nearly $14 billion in income, according to a study by the nonpartisan Citizens Budget Commission. The implications of the current spending bill could further accelerate this trend, posing a significant threat to New York's financial stability.
