By DAVID KLEPPER
Associated Press

ALBANY, N.Y. (AP) - Here's one way New York could fight back against the new federal tax code: allow people to make fully deductible charitable donations to the state in lieu of their state taxes.

That's one idea from a state report issued Wednesday that examines how New York could respond to the tax changes enacted by Washington Republicans. The law caps a deduction for state and local taxes, meaning many people in high-tax states like New York will see tax increases.

Cuomo, a potential 2020 presidential candidate, already has threatened to sue over the changes that he says will increase the tax liabilities of some New Yorkers by as much as 25 percent, or more than $14 billion a year overall, potentially prompting an exodus to cheaper states.

He said he wants to restructure the state's taxes to reduce the federal increases - without hurting the state's bottom line. Crafting a plan will be daunting enough, but convincing lawmakers from both parties to go along with it likely will prove even harder. Cuomo acknowledged as much during his budget address to lawmakers on Tuesday

"This is going to be the most difficult challenge that we've had to take on, because it's the most complicated and it comes at a difficult time," Cuomo said.

Under the first option, the state would set up charitable funds to receive contributions in exchange for a state income tax credit. Under this plan the state would still receive revenue and taxpayers could deduct the amount of their contributions from their federal taxes.

The report, compiled by state tax officials, also suggests several different forms of a payroll tax as one way to circumvent the new federal rules. Companies would pay the tax based on their compensation to workers; the money could be withheld from paychecks in a manner similar to current income tax withholding. Payroll taxes are still fully deductible under the new federal rules, so businesses could deduct the amount they're paying in new taxes, while individuals would be paying roughly the same amount, just in a different way.

Big questions remain, however: How would the state tax non-earned income, such as revenue from investments, dividends or unemployment compensation? How could the state ensure the payroll tax is applied fairly so individual taxpayers don't see big increases or decreases compared to what they're paying now?

Assembly Speaker Carl Heastie, D-Bronx, noted the challenges involved in overhauling state taxes but said it would be wrong "to just do nothing and have the federal government continue to pick the pockets of New York state."

Senior Republican leaders say they'll closely review Cuomo's ideas but are wary of doing anything that could scare businesses or worsen the state's business climate. State Republican Party Chairman Ed Cox was less diplomatic, saying Cuomo should look for ways to cut existing taxes rather than pursue a "ridiculous and unrealistic payroll tax that will only harm the state's economy further."

Any changes would be negotiated with lawmakers in the coming months. Lawmakers hope to pass a new state budget by April 1.