Cuomo Proposal Targets Carried Interest Tax Loophole in N.Y.

(Bloomberg) -- New York Governor Andrew Cuomo announced plans Thursday to target a tax break for investment fund managers in his state.

The proposal would impose a 17 percent “Fairness Fix” tax on hedge fund and private equity managers’ compensation -- reflecting the difference between a 20 percent federal rate that such earnings often qualify for and the top 37 percent rate it would face if it were treated as ordinary income, according to Abbey Fashouer, a Cuomo spokeswoman.

The “fix” would apply to those managers working in New York state, including those living outside the state, according to a statement from Cuomo. The statement says the change “could raise $1.1 billion annually.”

The measure would take effect only if Connecticut, New Jersey, Massachusetts and Pennsylvania enact similar legislation, according to the statement.

New York state currently taxes capital gains and ordinary income at the same rates, so Cuomo is proposing to effectively collect the tax that the federal government won’t be, said David Miller, a partner in the tax department at Proskauer Rose LLP. If the other states mentioned in Cuomo’s statement also adopt the tax change, “then Florida will become the hedge fund capital of the country,” Miller said.

By making the proposal contingent on other states acting in concert, Cuomo “has given himself a nifty escape hatch,” said Michael Kosnitzky, a tax partner at Pillsbury Winthrop Shaw Pittman LLP. Still, “this is probably the last straw for the remaining New York City fund managers,” he said. “This is like a pogrom on fund managers.”

Connecticut Proposal

Bruce McGuire, founder of the Connecticut Hedge Fund Association, called Cuomo’s plan “worrisome.” A similar proposal emerged in Connecticut last year. It would have levied a 19 percent surcharge on income derived from investment management service fees -- the difference between the capital gains rate of 20 percent, and the former top individual income tax rate of 39.6 percent.

Carried interest is the portion of an investment fund’s returns that are paid to hedge fund managers, private equity, venture capitalists and certain real estate investors. For federal tax purposes, it’s eligible for a tax rate of 23.8 percent -- which includes a 3.8 percent tax on investment income imposed by the Affordable Care Act -- on sales of assets held for at least three years. The top federal tax rate on individuals’ ordinary income was set at 37 percent as of Jan. 1.

President Donald Trump had pledged to abolish the tax loophole during his 2016 presidential campaign, but a split between his advisers and little support for the idea among Republican congressional leaders helped to keep the break alive at the federal level. Instead, the tax-overhaul legislation that Trump signed last month extended the holding requirement to qualify for the break to three years from one year previously.

Cuomo proposes to abolish the break entirely in New York.

“Closing this egregious loophole will further this administration’s efforts to promote economic justice and establish a fair tax code for working men and women across New York,” Cuomo said in the statement.

The “Fairness Fix” tax is “arbitrary and discriminatory,” and would “damage long-term investing and diminish New York’s competitiveness as a global financial hub,” said Laura Christof, a spokeswoman for the American Investment Council, a lobbying group for the private equity industry.

To contact the reporters on this story: Lynnley Browning in New York at lbrowning4@bloomberg.net, Henry Goldman in New York at hgoldman@bloomberg.net.

To contact the editors responsible for this story: Alexis Leondis at aleondis@bloomberg.net, John Voskuhl

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