New York Governor Andrew Cuomo announced plans Thursday to target a tax break for investment fund managers in his state.
The proposal would treat hedge fund managers’ compensation as ordinary income—instead of capital gains—for state tax purposes. It would also impose a 17 percent “Fairness Fix” on every hedge fund manager working in New York state, including those living outside the state, according to a statement from Cuomo. The statement doesn’t describe how that “fix” would work, but says it “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.
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.”
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 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.
Cuomo estimated the carried interest loophole costs New York state about $100 million annually.
