Why Is New York Still Taxing Unemployment Benefits?

Unemployed New Yorkers are receiving surprise tax bills. Republican legislators joined with progressive Democrats to move to waive taxes on benefits, following the lead of most other states and the federal government.

Daniel Moritz-Rabson   ·   April 29, 2021
"You're letting those who are downtrodden be taxed. You giveth and you taketh away." | Denisha Thomas

Before the pandemic shut down live events in New York City and wiped out two-thirds of the city’s arts, entertainment and recreation jobs, Stephanie Freed worked 14-hour days as an electrician for concerts, theaters and galas. Unemployment payments have helped her afford bills through the past year, though she hasn’t been able to pay rent in five months.

When she filed taxes for 2020, Freed discovered she owed New York State $1,200 for income taxes on unemployment benefits.

“The [maximum weekly] benefit at $504 dollars is already low, especially for those of us living in New York City, so taxing on top of that is just cruel, frankly,” said Freed, the Executive Director of ExtendPUA, an advocacy organization created during the pandemic.

New York, which has the second highest unemployment rate in the country, is one of just 11 states that is fully taxing unemployment benefits, according to H&R Block.

President Joe Biden announced in March that the federal government would not tax the first $10,200 of unemployment benefits for taxpayers earning less than $150,000 in 2020. Most other states either already exempted unemployment benefits from taxes, passed legislation to do so after Biden’s announcement or had tax codes that automatically aligned with the federal government’s.

In a rare show of bipartisanship, sixteen of New York’s 20 Republican state senators have joined with progressive Democrats to support legislation to waive taxes for the first $10,200 of benefits. Legislators from both parties described the taxes to New York Focus as a penalty on the state’s most vulnerable.

Yet the legislation failed to make it into this month’s state budget. Democratic legislators said the main obstacle was Governor Andrew Cuomo. Cuomo’s budget office, in turn, laid the blame on the federal government, telling New York Focus that the federal government did not issue guidance in time on whether waiving state taxes on unemployment payments was permitted.

But Cuomo’s office did not respond to questions about how other states were able to waive those taxes in the same period it claimed federal rules were unclear or whether it supported passing the bill in the remainder of the legislative session, leaving the bill’s prospects dubious.

Now, the 3.9 million New Yorkers who received $59.8 billion in unemployment benefits last year are being asked to pay back funds—and the state stands to generate money from unemployment benefits that were paid largely with federal funds.

All this money went to rent”

New Yorkers around the state said they were shocked to discover they owed the state hundreds and thousands of dollars.

Kelly Dungan, a single mother and restaurant worker who lives in the Bronx, supplemented her unemployment with food stamps and Medicaid. When she filed taxes, she discovered she owed $400 back to the state. 

Josh Davenport, a lighting technician for film and television, said he needed to pay back more than $2,000—money that could have helped cover medical debt he accrued during 2020. 

Last month, Freed encouraged members of a Facebook group for New Yorkers experiencing unemployment problems to contact elected officials to demand that taxes on benefits be waived. Members of the group argued with her, inaccurately saying that New York state was following the federal government’s lead. One took a screenshot of TurboTax guidance incorrectly advising filers that unemployment benefits would be exempt from state tax. (TurboTax did not respond to request for comment.)

Though the New York Department of Labor permits recipients to withhold tax, the agency only withholds 2.5 percent of payments for state income tax. The lowest earners in New York-- individuals who make up to $8,500 -- are taxed at a rate of 4 percent, meaning even those who requested the state withhold their taxes, like Freed, have ended up with surprise bills after filing their taxes. The Department of Labor is now also telling some people to return benefits it erroneously overpaid in April and May of 2020.

“Apparently they overpaid me and now they want it back,” said David Hanbury, a Brooklyn-based live performer who said the Department of Labor set his benefit rate at $158 per week. He sold guitars to fans to generate extra income during the pandemic. 

Earlier this month, the state asked for $600 back. “All this money went to rent. This money didn’t go to buy me a maserati,” Hanbury said.

“You giveth and you taketh away”

The lack of tax relief for unemployed workers has provoked bipartisan rebukes, with state lawmakers asking why those in a vulnerable financial position should be taxed on their benefits.

“These were federal dollars that the state received. So this is just a money grab in my opinion,” Senator George Borrello (R-57th District) said. “It certainly wasn’t a part of last year’s budget, so you can’t call it a loss when it was revenue you weren’t anticipating to get to begin with.” 

In late February, Senator Simcha Felder (D-17th District) introduced a bill to exempt the first $10,200 of unemployment benefits from taxes. The bill would cost the state around $1.4 billion for tax year 2020, his office told New York Focus.

At the end of March, as legislators haggled over the budget, Senator James Tedisco (R-47th District) brought it to the floor as an amendment.

“Four million individuals don't see much of a light at the end of the tunnel for their economic well-being. They don't know if they're going to be able to put food on the table. They don't know if they're going to be able to pay their rent. They don't know if they're going to be able to pay their mortgage and keep their house,” Tedisco said on the Senate floor on March 31. “You're letting those who are downtrodden be taxed. You giveth and you taketh away.”

Acting President Brian Benjamin (D-50th District) quashed the amendment by ruling it was not germane to proceedings. Democrats did not join Republicans’ vote to rule the bill germane. Benjamin, who also chairs the Budget and Revenue Committee, did not return requests for comment.

More than two dozen senators have now co-sponsored the legislation. But it failed to make it into the state’s $212 budget, passed earlier this month. 

The move frustrated both Republicans and Democrats. Borrello questioned why the needs of unemployed workers didn’t make it into the legislature’s “massive progressive wishlist.”

Senators Biaggi and Jabari Brisport (D-25th District), progressive Democrats from New York City, blamed Cuomo.

“The constraint we ran up against was we need to have a balanced budget and the governor was such an obstacle in any new additional taxes on the wealthy,” Brisport said. “We were unsuccessful [in] getting more money out of the rich this round in order to get this necessary relief.”

“It’s really not surprising for an administration that seems to really only care about wealthiest New Yorkers,” Biaggi said.

Cuomo’s office initially signaled interest in removing taxes on unemployment benefits. Asked why the proposal didn’t make it into the budget, Freeman Klopott, a spokesperson for the budget division, pointed to lack of clarity around a federal requirement that states that accept federal stimulus funds refrain from reducing taxes.

“In the final weeks of budget negotiations, the state sought clarity from Washington on its ability under that provision to reduce taxes on unemployment insurance benefits, and received it on April 7 as the Legislature was casting its final votes on the budget, making it too late to respond to the change,” Klopott said.

But Massachusetts and Ohio moved to waive state taxes on unemployment benefits in the period that Klopott said New York was awaiting federal guidance. Asked for comment on this discrepancy, Klopott did not respond.

Uncertain Prospects

Some legislators are now pushing to pass the bill in the remainder of the legislative season, which ends in June. There’s “definitely still a possibility” that it will pass, Biaggi said, adding that “there’s really no reason why New York state cannot follow the federal government’s lead.”

But legislation requiring significant amounts of revenue has rarely passed outside of the budget. “The senator is going to try to pass it but the simple reality is that a bill with this much of a fiscal implication is very difficult to do outside of the budget,” Bryan Best, Felder’s legislative director, said.

Senate Majority Leader Andrea Stewart-Cousins and Assembly Speaker Carl Heastie did not respond to requests for comment on whether they would give the bill a floor vote. The governor’s office did not answer a question about whether Cuomo would oppose the bill if the legislature were to pass it.

As the economy begins to improve, experts warn that an unequal recovery will leave behind those most in need of aid. As it stands, many of these hardest-hit New Yorkers will be the ones paying the surprise tax bills on unemployment.

“The fact that we’re having to advocate for this nugget instead of some actual relief is really frustrating,” Freed said. “New York is not taking care of us and that is really disappointing to see, New York not [taking] care of its arts and culture workers, or any of its workers that have been unemployed.”

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