New York Employment Tax is Bad Public Policy 

New Tax Actually Punishes Employers for Hiring

By Patrick Theisen, Executive Director, Americans for a Modern Economy

September 8, 2022

While businesses all over the state, especially in the hospitality and tourism sector among other small businesses, are still struggling to recover from the pandemic, the state of New York is, incredibly, imposing an ill-conceived tax on employment. The so-called “Interest Assessment Surcharge” on all employers is an effort by the state to pay down substantial debt incurred when the state borrowed nearly $10 Billion from the federal government in order to pay unemployment benefits to the thousands of people put out of work by COVID and its subsequent shutdowns. Shutdowns mandated by the state itself. Employers are being assessed a $27.60 PER EMPLOYEE tax made payable to the state labor department.

It is almost impossible to list all the reasons to be offended by this proposal. First of all, against the will of most employers, the state shut down small businesses across the state putting workers who wanted to work out of jobs, some permanently. And then that same state comes back and taxes those same employers for the privilege? It’s literally unbelievable. Secondly, a “head tax”, of which this proposal is a textbook example, is a deterrent to hiring! Why would any governmental body want to assess a fee for hiring workers? It makes absolutely no sense, especially as the country is likely heading into a recession. And lastly, the whole issue of tax fairness comes into play.

The Democratic party which currently leads the state has traditionally positioned itself as an advocate for tax fairness and has strongly opposed flat tax proposals as well as regressive taxation. This assessment is both. Most small businesses in the state, particularly in the restaurant, retail and hospitality sectors are traditionally labor intensive businesses that operate on razor thin margins. That means that their profit per employee is significantly less than other business models including manufacturing, banking and finance, healthcare, and the list goes on.

In recognition of that, Americans For A Modern Economy commissioned a study to not only examine the ad hoc nature of taxation policies like the one pending in New York, but also to assess the ability of employers to bear per-employee costs based on the profitability per that very same employee. The study, An Economic Analysis of Business Exemptions from Public Policies, finds that profits per FTE employee (henceforth, PPE) would be a superior measure of a firm’s ability to bear the burden of regulatory compliance because it simultaneously captures ability to pay and size.  It is also based on data elements (profits and employment) that are regularly reported by all types of firms on annual tax forms.  A focus on PPE is motivated in part by a recognition that average employment and profits per employee appear to be inversely related.  Some sectors are characterized by above-average profits per employee and below-average employment, while others have low PPE and high employment. 

“Policies like this are blind to a company’s underlying profitability, or ability to pay.  They are especially harmful to larger companies that create large numbers of jobs but operate in highly-competitive industries, and therefore experience lower profit margins.  A better policy would be based on something that is more closely linked to ability to pay, just like most business income taxes.” notes Donald Bruce, Ph.D. who is the author of the study.

The bottom line is that the businesses that are still struggling the most to recover from the pandemic are the same ones most vulnerable to policy proposals such as this. A per employee tax on the businesses that make the least profit per employee is at its core a regressive tax. We think the state needs to delay implementing this assessment and reconsider its approach to this important issue. We welcome the opportunity to participate in that discussion.

Americans for a Modern Economy is committed to ensuring that local, state and federal policies reflect changing technologies that are reshaping the way consumers, businesses and communities operate in the 21st century economy. We work with consumer advocates, businesses, think tanks, economic experts and others to raise awareness and inform discussions about the current and future policy challenges of new technology. We serve as a resource for lawmakers to help them develop modern policy solutions that benefit all Americans by expanding consumer freedom, allowing businesses to best serve their customers and preserving free market competition.