Over the course of my 10 years representing Rockland County and parts of Westchester County in the New York State Senate, I had to make a lot of tough decisions about our state budget. It’s never easy figuring out how to find more revenue when costs are already up for everybody. However, when it comes to raising taxes, there is such a thing as a bad idea. And New Yorkers should know one of those ideas almost got traction during budget negotiations this year.
New York policymakers are negotiating several proposed changes to the state’s pass-through entity tax — or PTET — credit as part of unresolved FY2027 budget discussions.
The pass-through entity tax, known as the PTET, was enacted by New York State in 2021. It was created in direct response to the 2017 federal Tax Cuts and Jobs Act, the tax bill from President Donald Trump’s first term. Trump’s tax law capped the deduction for state and local taxes — or SALT — at $10,000 for individuals. That cap significantly increased the federal tax burden for residents of high-tax states.
The PTET gave certain small businesses — partnerships and S corporations, which include many doctors and dentists, accountants, lawyers etc. — a way to restore the full SALT deduction. Businesses elect to pay state income tax at the entity level. Owners then receive a credit equal to what the entity paid. Because the entity-level payment qualifies as a business expense under federal law, it is fully deductible, effectively restoring what the SALT cap removed.
During a time when businesses all across the state are already struggling to survive, the PTET credit has been a lifesaver. By saving on their taxes, those businesses can invest in other ways, whether that’s hiring more employees or expanding their business.
Reducing PTET credits is a tax hike
Unfortunately, some lawmakers in both the New York Senate and Assembly proposed PTET credit reductions as part of the budget process. The Senate proposal, S.9009, and the Assembly version, A.10009, would reduce the state PTET credit to 90 cents for every dollar paid, and reduce the New York City PTET credit further, to 75 cents on the dollar. Proposals this year to reduce that credit below 100% would effectively subject the same business income to tax twice in New York — they are tax increases on small businesses, plain and simple.
Separately, New York City Mayor Zohran Mamdani and City Council Speaker Julie Menin called on Albany to authorize the city to reduce its own PTET credit from 100% to 75%, a significant tax increase on small business owners in the city.
Fortunately, Gov. Kathy Hochul rejected the proposals, saying “that’s not happening” and arguing the change would constitute an increase in personal income taxes. That’s exactly right. Hochul pledged not to raise income taxes, and she stood her ground.
The PTET structure is widely used across a range of business types, including law firms, medical practices, construction partnerships and small professional service firms. For those businesses, the credit offsets real tax liability on pass-through income and affects decisions about hiring, capital investment and operations.
There is also a timing problem. The March 15 PTET election deadline for tax year 2026 has already passed, meaning businesses have already opted in under the assumption of current credit rates. Any reduction applied to tax year 2026 would function as a retroactive change to their tax position.
Last-minute revenue hikes aren’t fair to NY
The PTET debate reflects a broader challenge facing Albany this session — one that I know all too well from my time in the New York Senate. The state budget is already weeks overdue. And they face real fiscal challenges. But last-minute proposals to raise taxes on small business owners is not the right solution. Governor Hochul was right to defend the PTET credit, and lawmakers in Albany should reject it as a policy option moving forward.
David Carlucci, a Democrat, represented the 38th Senate District, which includes most of Rockland County and parts of Westchester County, from 2011 through 2020.
This article originally appeared on Rockland/Westchester Journal News: NY’s Pass-Through Entity Tax credit is worth protecting | Opinion
Reporting by David Carlucci, Special to the USA TODAY Network / Rockland/Westchester Journal News
USA TODAY Network via Reuters Connect
