New York’s recently enacted fiscal year 2026-2027 budget decouples from various federal tax changes, but EY’s Scott Roberti said divergence between the state and New York City could create higher administrative burdens for some taxpayers.
Roberti added that looming changes in federal funding for state-administered programs, as well as macroeconomic conditions, likely mean budget pressures will continue next year.
Corporate Tax Rate Extended Amid Pressure
The New York budget extends a key temporary business tax rate, a move that was closely watched by the business community. Specifically, the budget extends New York’s temporary 7.25% Article 9-A business income base rate for taxpayers with a business income base of more than $5 million through 2029.
Roberti told Checkpoint that while the state’s rate is still “relatively high,” particularly when coupled with the New York City rate, the extension was “a good result for corporations.”
According to Roberti, there was pressure from the legislature to increase the corporate rate further. He noted that Governor Kathy Hochul “held tight on that,” preventing a combined New York state and city rate that could have approached 24% and become “confiscatory.”
While extending the current rate for three years means New York remains at the “higher end of the spectrum,” it keeps the tax situation the same for corporations operating in the state, said Roberti. However, he added that “there continues to be pressure from the legislature to raise that rate,” which is cause for concern for those doing business in New York.
State and City Diverge on Federal Decoupling
One point of “consternation” for businesses is the different treatment of some federal tax provisions between New York state and New York City, said Roberti. Companies may face different reporting requirements within the same state, he added, which poses an administrative and tracking burden.
He explained that while New York, like many states, had been expected to decouple from recent federal changes to the research and experimentation (R&E) expenditures provisions under IRC § 174 and IRC § 174A, the state and city chose different paths.
For state purposes, taxpayers must add back federal R&E deductions and are instead allowed a subtraction modification for expenditures paid or incurred after January 1, 2025, amortized over 60 months. The deduction for pre-2025 expenditures is determined as if IRC § 174, as in effect on January 1, 2022, applied.
For New York City purposes, the budget legislation also preserves an amortization-based recovery but calculates it ratably over a 5-year period beginning with the midpoint of the taxable year.
The state and city also differ on the IRC § 163(j) interest deduction. Specifically, New York City will require an addback for the increase in the federal interest deduction attributable to additional adjusted taxable income from depreciation, amortization, or depletion.
Roberti noted the divergence on provisions like R&E and business interest limitations under IRC § 163(j) was driven largely by the costs associated with conformity.
Impact on New York’s Business Competitiveness
While the new budget creates compliance challenges, its immediate impact on the state’s overall business competitiveness is unclear. “I think that book is still being written,” Roberti said. He noted that taxes are just one factor for businesses, alongside considerations like a “qualified workforce, housing for your people, transportation, and access to global markets.”
Roberti said many of the New York budget’s major provisions — particularly those decoupling from federal law — are largely “in line with what other states have done.”
But while New York’s budget may have served as a blueprint for other states in past years, that was not the case this year. The budget legislation was enacted at the latest time in 16 years, so its influence on other states was likely diminished, said Roberti.
Future Budget Pressures on the Horizon
While New York and other states spent a lot of energy this legislative session determining whether and how to conform to new federal tax provisions under the One Big Beautiful Bill Act, Roberti warned there are still challenges ahead.
Starting in fiscal year 2027, changes in federal law will alter how programs like Medicaid and SNAP are funded, reducing the amount of money transferred to states. As those changes go into effect, states will need to react, said Roberti. “If states decide to maintain their programs at the current levels, they’re going to have to fund those programs,” he explained. The question then becomes: “Where are they going to get that revenue?”
This pending fiscal cliff, combined with potential economic slowdowns and a large number of upcoming gubernatorial elections, means “there’s going to be a lot of focus on state budgets come calendar year ’27,” Roberti said.
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