NYS inflation reduction checks must be listed as income on federal taxes next year

 The nearly 8 million New York households getting a state inflation refund this fall may be in for a reality check next year in the form of federal taxes.

Households, including 1.25 million on Long Island, must list the refund of up to $400 as income on their federal taxes, the Gothamist reported. They will not be on the hook for a state tax levy. 

Gov. Kathy Hochul’s administration instituted the $2 billion program to give taxpayers financial relief after the state saw a surge in sales tax collections due to higher inflation, officials said.

However, several tax policy experts who spoke with Newsday on Wednesday say the program could return millions to the federal government at a time when the Trump administration has instituted cuts to safety net programs. Some financial forecasts indicate the federal government could slash $3 billion in funding to New York next year and more thereafter, Newsday reported.

The experts also suggest there are alternative ways to address persistent inflation outside of a one-time payment that gives money to the federal government. These alternatives include reducing sales taxes and indexing tax brackets and the standard deduction to inflation.

"While we support the Governor's focus on affordability — a central challenge to New York's competitiveness — the State faces significant budget gaps and looming federal cuts," Andrew Rein, president of the Citizens Budget Commission, a nonpartisan nonprofit, said in a statement. "There are better ways to use $2 billion to protect New Yorkers' future, including holding aside funds and using them to soften the initial blow of federal cuts."

E.J. McMahon, an adjunct fellow at the Manhattan Institute, a right-leaning think tank, estimates the checks could put anywhere from roughly $250 million to $300 million into the federal government.

"At a time when you're complaining about budget holes, you have basically concocted a scheme that is going to send $250 to $300 million ... to the federal government. You're sending aid to the federal government," he said in a phone interview.

In general, he doesn’t believe a one-time tax giveback is good tax policy. But the state, he said, could have avoided giving money to the federal government by enacting a one-time tax cut, so maybe a joint filer would pay $400 less in taxes.

State officials said many of the other options "would not deliver any immediate relief."

The checks, based on the 2023 tax year, could provide payouts to single filers who earn up to $150,000 and joint filers who make as much as $300,000, officials said.

Tim Ruffinen, a spokesperson for the state Division of Budget, said the checks were only part of the governor’s $4 billion tax agenda, which includes free school meals and a tax cut for the middle class.

"The Governor remains laser focused at tackling the affordability crisis with real, tangible initiatives, that deliver immediate relief to individuals and families across the state," Ruffinen said in an email to Newsday on Wednesday.

Jared Walczak, vice president of state projects at the Tax Foundation, a Washington-based nonpartisan nonprofit, said residents were living in a climate in which significant inflation increases had largely ended, but prices had not decreased.

"A one-time rebate does not feel timely and seems like a bit of a gimmick," he said in a phone interview on Wednesday. "The strongest needs were probably several years ago."

By Tiffany Cusaac-Smith

tiffany.cusaac-smith@newsday.com@T_Cusaac

Tiffany Cusaac-Smith is a general assignment reporter for Newsday. She previously worked at USA TODAY and is an alum of Howard University.