A tax hike for some key NY firms is lurking in Trump's tax cut bill

Unincorporated finance partnerships, among others, would lose access to a SALT cap workaround

Embedded among the tax cut provisions of the pending federal budget bill is a potential tax increase for unincorporated professional service firms and partnerships—including some of the Empire State’s highest-earning taxpayers. If enacted, it would raise the already high cost of doing business in New York for a chunk of the securities industry, in particular. Needless to say, this would not be a positive development for a state tax base that in a good year depends on Wall Street for one-fifth of its revenue.

(See important update at end of post.)

What President Trump has insisted on labelling “The One Big Beautiful Bill” (aka H.R. 1, for those with low bombast thresholds) would extend and add to the tax cuts Trump signed into law as the Tax Cuts and Jobs Act of 2017, most of which are otherwise due to expire at the end of this year. The current version of the bill passed the House of Representatives by the narrowest of margins on May 22, only after the Republican House leadership yielded to demands by suburban members from high-tax states for an increase in the 2017 law’s $10,000 cap on state and local tax (SALT) deductions for individuals.

The H.R. 1 tax provision commanding the most attention in New York would lift the SALT deduction cap to $40,000. That change, said Rep. Michael Lawler (R-Suffern), “will provide immediate relief to millions of New Yorkers” and “will be a massive lift to millions of New Yorkers.” Lawler’s colleagues from suburban New York, New Jersey and California echoed those remarks.

In fact, the damage supposedly done by the SALT cap to middle-class filers has been greatly exaggerated by New York pols in both parties—because these households also saved money thanks to other changes in the 2017 law, including lower rates, a doubling of the standard deduction and child credits, and a rollback of the Alternative Minimum Tax (which disallows any SALT). The biggest losers from the SALT cap—who won’t benefit from the cap increase—are millionaire earners, who also were targeted by significant, supposedly temporary state income tax hikes enacted in New York in 2021 (and extended into the 2030s under the new state budget). Nonetheless, the higher cap will be quite expensive in federal budgeting terms. Even a smaller SALT cap increase to $30,000 in an earlier version of the bill was estimated to reduce revenues by $175 billion over the next 10 years, according to an initial Tax Foundation estimate.

The SALT deduction take-back

Meanwhile, in a less widely noticed change, H.R 1 also would slash the now-uncapped SALT deductions of some business owners now opting to pay New York State’s Pass-Through Entity Taxes (PTET) and its local equivalent in New York City. So named because their profits pass (or flow) through to owners and shareholders, these businesses don’t pay federal or state corporate taxes at the entity level; instead, their owners pay individual income taxes on their share of allocated profits.

New York is one of 36 states that enacted some form of PTET following a November 2020 IRS notice that gave businesses other than C corporations an avenue for deducting 100 percent of SALT paid on attributed profits. The entity gets to claim a full federal deduction for PTET liability, a tax break effectively shared among the owners and partners¹—who, under New York’s version, get to claim a fully refundable credit for PTET payments on their state and city personal income taxes, thus avoiding double taxation.²

However, the same section of H.R. 1 that raises the SALT cap (Sec. 112018) contains language prohibiting a pass-through of uncapped SALT deductions to owners of firms defined by the Internal Revenue Code as Specified Service Trades or Businesses, or SSTBs. That category encompasses a broad range of professional service providers including investment advisers, managers and brokers; medical and dental practices; accountants; actuaries; and entertainment producers, among others.

There are exceptions to that exclusion—for example, insurance brokerages (though overwhelmingly unincorporated) are not classified SSTBs, and thus can continue to claim a full pass-through of SALT deductions. And while architectural and engineering firms are SSTBs, H.R. 1 specifically preserves their entity-level pass-through SALT deductions. (See explanatory posts from the Tax Foundation and the Bipartisan Policy Institute.)

Why the inconsistent treatment of unincorporated entities? The fiscal motive for Republican bill-drafters is fairly obvious: the professional firms and partnerships with the highest taxable incomes are concentrated in a few key professions in heavily taxed (and politically deep blue) states, particularly in the financial and corporate centers of New York City, San Francisco, and Chicago. Raising their federal taxes by capping their deductions will generate billions in annual federal income tax revenue to help offset a share of the cost associated with raising the SALT cap for everyone else. Indeed, the Tax Foundation estimates the business SALT changes will raise $73 billion between federal fiscal years 2025 and 2034, or a little less half the estimated added cost of the higher cap for individual households. A disproportionately large chunk of that is sure to come from affected New York businesses.

Estimating the tax toll

So, in dollar terms, how much of a New York-specific impact are we talking about here?

Although PTET is now in its fifth year, the state Department of Taxation and Finance hasn’t released detailed sector or income distribution figures for PTET payers, who number well into the tens of thousands of firms. However, the New York City Finance Department has compiled some broad business sector data on more than 25,000 payers of the city’s PTET, which can serve as the basis for estimating state PTET impacts on city firms as well.

As of tax year 2023, according to the department, firms opting into the city PTET generated total liability of $1.8 billion on total entity-level income of nearly $46 billion. Just over half of the total liability could be traced to companies in the Finance and Insurance sector, whose 3,382 PTET payers reported about $24 billion in taxable income, an average of $7 million per entity. As noted above, unincorporated insurance firms do not fall into the SSTB category and thus would not be among those losing their SALT deductions. It’s worth noting, however, that insurance firms of all types represent a small share of the Finance & Insurance sector—28 percent of the employer establishments, but just 11 percent of earnings as of 2023, according to personal income and employment data. (And the earnings and employment figures include large insurance carriers, who pay corporate tax and not PTET.)

For estimating purposes, therefore, let’s assume that finance firms accounted for roughly $21 billion of taxable income (89 percent) at the entity level—still nearly half the city PTET total. The next largest category of city PTET payers consisted of 951 Legal Services firms, which in 2024 generated total PTET liability of $301 million on total entity level income of just over $7.8 billion. Health Care and Performing Arts entities, also in the SSTP category, had taxable income totaling about $1.6 billion, much lower per-entity averages than the Finance and Legal Services sectors, and they paid PTET taxes of about $64 million. Among the remaining five sectors broken out by Finance Department data, those categorized as Real Estate, Trade, and Manufacturing are not SSTBs, and services in the Professional/Technical and Other would inevitably include some that are but others also not subject to the tax change.³

So, to narrow the focus, counting only the two largest sectors—Finance (minus the imputed Insurance sector share) and Legal Services—total taxable incomes reported on city PTET returns in 2023 totaled about $28.5 billion. Their city and state PTET liability can be estimated at roughly $4 billion. Firm owners and partners in these sectors would see their individual SALT deductions increased to $40,000 in the current version of H.R. 1, but many probably have additional tax deductions (e.g., generated by taxes on property, personal investment, and income from other ventures) that will eat up that $40,000. In any case, the maximum SALT deduction of $40,000 (indexed to rise with inflation annually) would be available only to partners and owners whose incomes fall below a $500,000 cutoff.

Assuming average taxable incomes subject to the top federal rate of 37 percent, the estimated loss of $4 billion in SALT deductions (arbitrarily discounted 20 percent to reflect the higher maximum individual SALT cap) would represent a federal tax increase of roughly $1.1 billion for New York City-based firms. Given the lack of more detailed data on the affected firms and their owners, this is necessarily a rough estimate—but, if anything, it could be on the low side. As noted, it does not include pass-through entities in Health Care (medical and dental practices) and Performing Arts (film, TV and theatrical production companies).

Viewed from another angle, the loss of the PTET workaround effectively is tantamount to a 5.5 percentage-point increase in the combined marginal city and state income tax on Finance and Legal Services firms in the highest brackets.⁴ This would obviously give these firms an added incentive to minimize exposure to city taxes. To be sure, for legal partnerships, accountants, doctors, and consultants who need proximity to their clients, pulling fully away from the city’s tax nexus wouldn’t be easy. But investment advisers and fund managers—including hedge funds and private equity funds—would have one more reason to consider moving to a lower-taxed jurisdiction or shrinking their city footprints.

It’s not as if New York City’s share of the nation’s securities industry jobs wasn’t already dropping. As noted in a 2024 report by the Securities Industry and Municipal Finance Association:

As of December 2024 [preliminary data], the securities industry employed 213,000 individuals in [New York State], a decrease of 7,000 positions, or 3.2%, year-over-year. Of these jobs, 194,000 positions, or 91.1% were in [New York City], where securities industry employment contracted by 5,100 jobs, or 2.6%, in 2024. Moreover, despite recovering the large job losses fueled by the COVID-19 pandemic, the securities industry footprint in [the state and the city] continues to slowly decline as job growth has been stronger nationally. Since the pandemic low in May 2021 … NYC has added 18,300 positions (an increase of 10.4%). Over the same period, the securities industry recovered 148,800 jobs, or 15.1% nationwide.

So, how many of those 213,000 securities industry jobs are supported by unincorporated firms affected by the potential repeal of the SALT cap work-around? Again, unfortunately, data are lacking. Public filings show that some of New York’s biggest investment banks—including Goldman Sachs, Morgan Stanley, and Blackstone—are organized as “C” corps and thus unaffected by the PTET change. Others have complicated structures stretching into both the “C” and unincorporated realms. To be sure, the partners and chief executives of these businesses have, like other multi-millionaire earners, typically have seen well over 90 percent of their individual SALT deductions disappear since 2017—but the SALT toll on their firms’ profits would remain fully deductible on corporate returns under H.R. 1.

Nonetheless, as the numbers for New York City PTET indicate, the city is the business base for several thousand finance outfits — investment funds, money managers, traders, dealers, brokers—who will see their federal tax bills increase noticeably under H.R. l draft passed by the House last month. That higher federal tax will actually reflect the higher net cost of New York taxes, due to the loss of full SALT deductibility—something thousands of high earners outside the PTET universe have already been experiencing since 2017.

Economic consequences

Analysts employed by the non-profit, non-partisan Tax Foundation have long opposed providing any SALT deduction on individual income taxes (an arguable position, to be sure). But that hasn’t stopped them from pointing out the likely adverse consequences of raising federal taxes on a broad swath of the professional services sector. From the Foundation’s preliminary analysis of H.R. 1:

The SALT deduction cap represents good policy, and the lack of a deduction does not yield double taxation. But businesses are ordinarily able to deduct their business expenses, of which taxes are a part. These PTETs, for all their shortcomings and all the questions they raised, were a patch [in the 2017 tax cut law] to restore that treatment.

Disallowing SALT deduction cap workarounds for SSTBs would reduce GDP by 0.2 percent and the capital stock by 0.3 percent, per Tax Foundation analysis. And by disallowing PTETs only for some pass-through entities, the new approach diverges even more sharply from the principle of tax neutrality than the current system, by creating substantially differential tax treatment for various types of pass-through entities.

If the national GDP impact of eliminating SALT deductions for some pass-through entities -0.2 percent, the relative negative impact on New York City’s economy (and by extension the state’s) will surely be greater than that, given New York’s higher taxes and concentration of high-earning securities firms and other professional partnerships.

Where it goes from here

Congressional Republicans have said they’re hoping to pass an agreed-upon budget reconciliation bill passed by July 4. But differences between the Senate and House won’t be easily resolved. H.R. 1 already would add $2.4 trillion to the deficit, the Congressional Budget Office has estimated.

As The New York Times reported this week, Senate Republicans want to see “major changes” to H.R. 1 including fewer “cuts” to Medicaid and restoration of some green energy tax credits eliminated by the bill. They also are unenthusiastic about the proposed elimination of taxes on tips and overtime, both personal favorites of the president. Then there’s that increased SALT deduction limit. From the Times:

While the [SALT cap] change was necessary to win the support of blue-state Republicans in the House, senators are less committed to the policy. Senator John Thune of South Dakota, the Republican majority leader, recently remarked at the White House that “there really isn’t a single Republican senator who cares much about the SALT issue.”

If Senate Republicans don’t care much about the SALT issue for individual households, they no doubt care even less about the impact of extending the SALT cap to the business incomes of well-heeled investment managers and white-shoe lawyers in big financial centers.

Bottom line: if the Senate and House can get together on any reconciliation bill before summer recess, it’s likely to include a provision turning up the state and local tax heat on a portion of New York’s securities industry, among other professional and business services.

UPDATE: Unbeknownst to me, on the same day I posted this analysis (June 12), the New York City Comptroller’s Office posted its own report on the impact of H.R. 1, entitled “The SALT Deduction in the House Budget Bill.” The subhead of the analysis by the comptroller’s staff confirms the main point of my post (“A High Tax for High-Income NYC Taxpayers”), but their report also includes a very important detail I failed to mention: H.R. 1 also would make “substantial portions” of city Unincorporated Business Tax (UBT) and General Corporation Tax (GCT) payments, which are currently deductible, subject to federal individual income taxes for partners of firms in the same sector affected by nullification of the PTET workaround. These taxes pre-date the 2017 tax law by 51 years and were never SALT cap workarounds.

1. This group includes partners living in other states.

2. This interchange of the additional tax payments and the refundable credit is treated as revenue neutral by the state and the city.

3. Insufficient data were available to identify the business sector of 5,418 city PTET filers, more than one-fifth the total. Their entity-level incomes averaged about $500,000.

4. The combined top rates of the state and city income tax is 14.8 percent. For those in the 37 percent federal tax bracket, a full SALT deduction decreases the effective state-city marginal rate to 9.3 percent.