New York Passes Fiscal 2027 Budget, Ushering in Wide-Ranging Tax Reform

New York State enacted its fiscal year 2027 (FY 2027) budget on May 28, 2026, following ratification by the state legislature on May 27, delivering a sweeping $268 billion fiscal package with significant policy implications across a broad range of areas. Enacted through 10 separate budget bills, the legislation reflects another expansive use of the budget process to implement both major appropriations measures and substantive policy changes with potentially far-reaching consequences for taxpayers doing business in the state.

From a state and local tax perspective, the enacted budget is notable not only for what it changed, but also for what it preserved. Despite the scale of the legislation and continued pressure on revenue and spending priorities, the budget does not increase New York’s personal income or business tax rates. Most important for corporate taxpayers, the budget extends through 2029 both the 7.25% corporate franchise tax rate on business income and the 0.1875% business capital base tax rate, reinforcing the state’s current corporate tax structure and providing a measure of near-term rate certainty in an otherwise complex and evolving tax environment. The budget also extends the reduced transfer tax rates for qualified real estate investment trusts through September 1, 2029. 

Although the New York state budget establishes state-level funding and policy priorities that might benefit New York City, it does not replace the need for the city to adopt its own budget.  New York City must still enact its budget to fund local operations, satisfy city-specific obligations, and preserve financial flexibility. The New York City budget is under review by the City Council; on approval by a majority vote, it will be formally adopted and will take effect July 1, 2026.

Decoupling From the One Big Beautiful Bill Act

The FY 2027 budget includes targeted state and city decoupling provisions from some amendments made by the One Big Beautiful Bill Act (OBBBA), reflecting a clear legislative policy to protect the New York tax base from federal changes that would otherwise accelerate deductions and materially reduce state and local tax revenues. 

At the state level, the budget amends Tax Law §§208(9), 612, and 1503(b) to prevent automatic conformity to OBBBA provisions allowing 100% immediate expensing for qualified production property placed in service in tax years beginning on or after January 1, 2025. Instead, New York has retained its preexisting depreciation treatment for those assets, thereby requiring taxpayers to continue applying New York’s current modification framework rather than the enhanced federal cost recovery rules. 

The legislative package also addresses the OBBBA’s revision to the treatment of research and experimental (R&E) expenditures by decoupling from the new federal rule allowing an immediate 100% deduction for domestic R&E expenditures paid or incurred in tax years beginning on or after January 1, 2025. In doing so, New York has kept its own treatment for domestic R&E costs while conforming its treatment of foreign R&E expenditures to a 15-year recovery period, aligning that aspect of state law with the revised federal regime.

The FY 2027 budget adopts parallel and, in some respects, broader New York City decoupling changes to Administrative Code §§11-506, 11-602(8), 11-641, and 11-652(8). Those provisions preserve the city’s tax treatment for qualified production property depreciation, domestic R&E expensing, business interest limitation mechanics, and expensing thresholds for depreciable business assets. As at the state level, New York City decouples from the OBBBA’s allowance for full expensing of qualified production property and from the federal rule allowing the immediate deduction of domestic R&E expenditures while conforming to the revised federal treatment of foreign R&E expenditures over 15 years.  

The New York City focused legislation goes further than the state provisions by also decoupling from the OBBBA’s changes to the computation of adjusted taxable income (ATI) for purposes of the business interest limitation in Section 163(j) of the Internal Revenue Code. Thus, where the OBBBA would allow ATI to be computed without regard to depreciation, amortization, and depletion, the city requires those items to remain reflected in the ATI computation, maintaining a narrower base for interest deductibility. Further, although the OBBBA increased some Section 179-style expensing thresholds for equipment and software, the budget provides that New York City will not conform to those enhanced amounts and instead will retain the thresholds that applied immediately before passage of the OBBBA.

Collectively, those state and city decoupling provisions create a more complex post-OBBBA conformity landscape and will require taxpayers to reassess depreciation, capitalization, R&E cost recovery, and interest limitation calculations separately for federal, New York state, and New York City purposes.

Finally, based on the FY 2027 budget changes tied to decoupling from retroactive OBBBA provisions, the legislation generally provides targeted relief from interest and some penalties for underpayments attributable to that decoupling. In substance, the relief is intended to protect taxpayers that may have reasonably computed New York liability using federal rules before the state enacted its nonconformity provisions, particularly if the federal change applied retroactively and the state or city later required different treatment. The relief is not a wholesale waiver of all additions to tax; rather, it is aimed at underpayments that are specifically caused by the retroactive state or city decoupling adjustments.

Practically, that means taxpayers might be able to avoid interest and/or penalty exposure if an underpayment arose from items such as the state and city’s decoupling from OBBBA provisions affecting qualified production property depreciation, domestic R&E expensing, and, for New York City, ATI and expensing-threshold changes. The key technical questions are whether the statute makes the relief automatic or conditional, what the covered tax periods are, whether relief applies to both state and city taxes, and whether taxpayers must timely pay the additional tax by a specified date to qualify.

Extended Pass-Through Entity Tax Election Deadline

The FY 2027 budget materially revises the procedural framework for both the state and city’s pass-through entity tax (PTET) by extending the annual election deadline from March 15 to September 15 of the applicable tax year. The legislation amends Tax Law §860(c) and corresponding city rules to provide taxpayers with substantially more time to evaluate whether an election is beneficial in light of projected income, owner composition, apportionment, and federal deduction considerations. That change is particularly significant for partnerships and S corporations whose ability to make an informed PTET election has historically been constrained by the early-year deadline, often before the entity had adequate visibility into expected taxable income, resident owner mix, or the comparative state and local tax consequences for its owners.

The budget also makes conforming changes to the estimated payment regime to reflect the later election date, with payment obligations now keyed to when the election is made rather than assuming election by March 15. As a result, electing entities will need to monitor revised installment timing and the interaction between election mechanics and required prepayments to avoid underpayment exposure.  The amendments apply to tax years beginning on or after January 1, 2027, and therefore will first affect elections for the 2027 tax year.

From a practical standpoint, the extension provides a meaningful planning opportunity, but it also introduces new compliance considerations because taxpayers will need to coordinate election timing, estimated tax payments, owner-level credit expectations, and multistate PTET analyses under a revised statutory timetable.

Sales Tax Vendor Reregistration Program Authorized

The FY 2027 budget authorizes the Department of Taxation and Finance to implement a comprehensive statewide sales tax vendor reregistration program to be completed by December 31, 2030. That is intended to strengthen the state’s administration of the sales and use tax by requiring registered vendors to revalidate their registration status and provide updated information necessary for the Department to maintain a more accurate and current vendor registry. From an administrative perspective, the measure is designed to improve the state’s ability to monitor filing populations; identify inactive, duplicative, or noncompliant accounts; and support more effective enforcement and compliance oversight across the sales and use tax system.

Although the budget frames the program as an administrative initiative, the implications for taxpayers could be significant. A full reregistration process can require vendors to confirm legal entity information, responsible party details, business locations, nexus-related facts, and other registration data that might affect the Department’s view of a taxpayer’s filing obligations and historical compliance posture. As a result, businesses registered for New York sales tax should anticipate further guidance regarding timing, procedures, and required disclosures and should begin evaluating whether their registration records, entity structures, and filing profiles are current and internally consistent. 

Pied-à-Terre Tax

New York’s FY 2027 budget includes the creation of a New York City pied-à-terre tax in the form of an annual surcharge on some non-primary residential property. Effective July 1, 2026, the tax applies to second homes in New York City that exceed specified valuation thresholds. It is imposed on property owners, including individual owners, trust beneficiaries, or majority partners or shareholders of a limited liability company (LLC) that owns the property.

Primary residences are excluded, as are vacant land and unsold sponsor inventory in newly developed buildings. Property is treated as a primary residence if it is occupied for more than half the year by the owner, an immediate family member, or a tenant under a lease of at least one year. The measure therefore creates a new annual tax regime targeted specifically at high-value residential property held for non-primary residential use, with particular importance for nonresident owners and properties held through trusts and closely held entities.

From a technical perspective, the legislation adopts a two-phase valuation framework. During the initial period of July 1, 2026, to July 1, 2028, liability is determined using the New York City Department of Finance’s property tax market value methodology, even though values could diverge significantly from actual sales prices. Because that methodology treats property classes differently, the temporary thresholds also differ by class: 

• Class 1 property (generally single-family homes) becomes subject to the tax beginning at a $5 million market value. During the initial two-year period, the surcharge is imposed at graduated rates of 0.8%, 1.05%, and 1.3% for market value bands of $5 million to $15 million, $15 million to $25 million, and above $25 million, respectively.
• Class 2 property (including condos and co-ops) becomes subject to the tax beginning at a $1 million market value. In the initial two-year period, the surcharge is imposed at 4%, 5.25%, and 6.5% for market value bands of $1 million to $3 million, $3 million to $5 million, and above $5 million, respectively. 

Beginning July 2028, the state intends to transition to a comparable-sales-based valuation system, after which all covered properties will be subject to a uniform $5 million threshold. Under the budget, all properties will then use the Class 1 rate structure. The budget also establishes administrative procedures under which primary residence status for a fiscal year is determined based on taxable status as of January 5 of the prior fiscal year. It charges the Department of Finance with issuing determinations and notices and implementing rules and other provisions addressing contests, appeals, audits, and penalties for avoidance or circumvention. As a result, taxpayers with high-value New York City residential property should promptly evaluate ownership structure, occupancy patterns, valuation methodology, and documentation supporting primary residence treatment. Further administrative guidance will likely be critical to understanding the full compliance and planning implications of the new tax.

Other Provisions

The budget includes changes affecting the tax treatment of tip wages, the deductibility of charitable contributions, and the extension and enhancement of multiple state tax credits, along with a range of other notable provisions affecting non-income-based taxes. Collectively, those changes further underscore the breadth of the budget’s tax impact beyond the headline income and business tax provisions.

Tax Proposals Considered but Not Enacted

One of the most important takeaways from the FY 2027 budget is not only what was enacted, but also what did not make it into the final legislation.

Most notably, the final budget did not increase the state’s corporate franchise tax rate on large taxpayers, although proposals were floated to raise the rate to roughly 9% to 9.25% for corporations above specified business income thresholds. 

Likewise, the budget did not adopt proposals that would have reduced the value of the state PTET credit to 90% or the city PTET credit to 75%. Those changes would have preserved the federal deduction for PTET payments while permanently denying a corresponding portion of the New York benefit. Had those proposals been enacted, they would have fundamentally altered the economics of the PTET election by converting what is generally intended to be a tax-neutral workaround into a regime producing a deliberate state- and city-level haircut. 

The FY 2027 budget also omitted broader proposals to increase tax burdens on high-income individuals and New York City taxpayers, including possible changes affecting the unincorporated business tax, targeted measures for high-income city residents, and related proposals that would have effectively increased tax liabilities through structural limitations rather than explicit headline rate increases.

Equally significant, the enacted budget did not decouple the state or city from the OBBBA’s federal treatment of qualified small business stock (QSBS) under IRC Section 1202 or qualified opportunity zone gain deferral and exclusion under Section 1400Z-2, despite serious consideration of those measures during the legislative process. In particular, the rejected QSBS proposal would have required taxpayers to add back 100% of federally excluded gain for New York purposes, effectively subjecting otherwise exempt gain to full state — and potentially city — tax, with a proposed retroactive effective date of January 1, 2025. For founders, investors, and private equity participants, that proposal would have been a major departure from New York’s historic conformity posture and could have imposed a substantial incremental combined state-city tax cost on transactions already closed or underway. The final budget also did not extend the sales tax provisions of the Dodd-Frank Act or impose a new digital asset mining excise tax. 

Taken together, those omissions are highly consequential: They preserve the treatment of several high-profile and economically sensitive items and reflect a legislative decision — at least for now — not to adopt some of the most aggressive tax increases and retroactive conformity changes considered during the FY 2027 budget negotiations.