A UBIT for New York City?

In its 2012 budget options report for New York City, the Independent Budget Office offers 72 options for balancing the city budget. One of the options discussed is an unrelated business income tax on exempt organizations in New York City. The city UBIT would be in addition to the federal and New York state taxes on unrelated business taxable income.

 Note: An exempt organization that carries on an unrelated trade or business in the state of New York is subject to a 10% tax on its UBTI. N.Y. TAX. LAW § 290

 The city UBIT would use the same definition of UBTI as the federal tax and would involve similar computations. Thus, the tax would only apply to income from a regularly conducted trade or business that is unrelated to an organization’s exempt purposes.

 According to the report, an 8.85% tax rate on UBTI of exempt organizations in New York City would generate $10 million annually. The 8.85% tax rate corresponds to New York City’s corporate tax rate. A city UBIT would require approval by the New York legislature.

 Potential advantages of a city UBIT include leveling the playing field for taxable corporations. Also, because the city UBIT would parallel the federal and state taxes, the additional administration burdens for exempt organizations would be nominal. The primary objection to a city UBIT is likely to be further erosion of the resources of exempt organizations when demand for their services is increasing due to unfavorable economic conditions.