The latest idea to mop up New York City’s red ink is to soak the city’s highest earners with what amounts to an income-tax hike—one that will put municipal finances on an even shakier footing.
The tax scheme, which Mayor Zohran Mamdani and City Council Speaker Julie Menin floated on Tuesday, revolves around the state Pass Through Entity Tax (PTET). New York, along with other high-tax states, created the tax, and an associated credit, to get around the tight limits the 2017 federal tax law put on the amounts of state and local tax that individuals could deduct from their federal bills.
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Essentially, PTETs allow partners, principals, or other co-owners of closely held businesses to pay their individual state taxes at the office through a business-level tax. Those tax payments are then credited dollar-for-dollar toward each person’s individual state and city income tax bills, while simultaneously being treated as fully federally deductible business expenses.
The state PTET became available in 2021, and Albany allowed New York City to set up a PTET of its own in 2022. Together, these taxes effectively restored a full federal deduction of city income taxes for eligible business owners.
Mamdani and Menin want Albany legislators to allow the city to trim the amount of PTET credits that can be applied to city income tax bills. Specifically, they want to cut PTET from being a 100 percent rebate to 75 percent, allowing deduction of three out of every four dollars paid. They expect the change will “generate nearly $1 billion in additional revenue, while still allowing New York City residents to save on federal taxes.” Filers making at least $1 million claimed about 95 percent of New York City’s 2023 PTET credits.
Legislative Democrats actually floated the same change in their budget proposals last month. Both Senate and Assembly Democrats called for limiting the city PTET credit to 75 percent, saying it would raise $700 million for New York City. Senate Democrats had also called for limiting the state PTET credit to 90 percent to bring in an extra $1.8 billion for Albany.
Putting aside the risk of accelerating New York City’s tax-base erosion, Mamdani and Menin are trying to balance the budget with the shakiest, and most poorly understood, form of revenue possible. They may also be overstating the revenue potential for the city.
According to the city Finance Department and federal statistics, most state PTET revenue originates in the finance sector. A substantial fraction of those receipts are linked to capital gains, meaning they can surge, or evaporate, in short order.
Unlike the personal income tax—where the flow of money goes lopsidedly into government coffers—PTET involves a churn of taxes paid by firms and comparable amounts of credits claimed by individuals. That makes it tougher to project where net receipts will land. Tax wonks, meantime, are still getting their arms around whether or why firms choose to participate (or not) in this relatively new tax each year, further complicating forecasting.
In Fiscal Year 2025, New York City netted $2.4 billion from PTET, up 42 percent compared to the prior year but down slightly from FY2023. It remains to be seen how pocketing a quarter of the PTET handle would get the city to Mamdani and Menin’s “nearly $1 billion” figure—and whether the governor and the state legislature would sign off. Hochul appears to have drawn a red line on Tuesday, saying “it’s not happening.”
Even if it doesn’t work out, by even considering it, Mamdani and Menin are contributing to the atmosphere of uncertainty for New York City’s high earners. The pair are working to close a budget gap that opened only because spending repeatedly outpaced revenues amid an economic expansion. Mamdani has spurned time-tested methods for tightening city-agency belts in favor of more abstract “savings” efforts.
It’s especially notable that Mamdani and Menin are making this push after the March 15 PTET election deadline for tax year 2026. That means that they’re seeking what amounts to a retroactive tax increase—in the absence of anything resembling emergency conditions.
Between Mamdani’s almost-gleeful announcement of a new “pied-à-terre” tax on April 15, this new PTET push, and city leaders’ unwillingness to challenge cost drivers, it’s unlikely that this will be the last time that New Yorkers hear about the urgent need for a creative new tax.