Tuesday the Illinois State Senate took a bold step in fighting inequality by becoming the first state chamber in the country to vote in favor of closing the carried interest loophole. State Senator Daniel Biss led the charge, sponsoring the bill and championing the need for a more equitable tax code in Illinois and the country.
The carried interest loophole allows hedge fund managers to mischaracterize their income as capital gains and have it taxed at half the usual rate, even though they do not assume the risk of investment with their own income. It is nothing but a giveaway to the ultra-wealthy.
The bill will now move over to the state’s house chamber, where it stands a good chance of passing. The biggest hurdle to making the bill a reality and closing the carried interest loophole in Illinois is Republican Governor Bruce Rauner.
Frankly, Rauner is likely to veto the bill. The governor has himself benefited enormously from the carried interest loophole, to the tune of several million dollars in taxes that he has managed to avoid through it.
One of the biggest opponents of closing the carried interest loophole at the federal level is the American Investment Council. It is headed by John Boehner’s former Chief of Staff Mike Sommers (who to date has refused to accept our request for a debate!). The American Investment Council has led an aggressive campaign to miseducate and misinform the American people about the true scope of the carried interest loophole. Incidentally, the private equity firm GTCR, that Bruce Rauner helped found, is a member of the American Investment Council.
And it’s not just his own personal finances that Rauner is seeking to protect. He just received a $20 million donation from Citadel LLC, an Illinois financial market company. Ken Griffin, the founder and chief executive of Citadel is also a longtime beneficiary of the carried interest loophole. Ken Griffin is trading campaign contributions for preferential treatment in the tax code. A $20 million contribution is keeping a loophole open that will net him billions in the long term.
The issue of carried interest is not unique to Illinois. Wall Street’s influence on Congress was front and center in the 2016 election, when Americans were questioning if Congress had been completely co-opted by Wall Street. All of the presidential candidates campaigned on closing the carried interest loophole, and Donald Trump capitalized on it as a means of demonstrating his credibility as a “populist” candidate. And yet now, more than four months into his presidency he has yet to take any steps towards closing the loophole. That is unless you count proposing to lower the top income tax rate to the same 15% that capital gains enjoy. This would close the loophole by bringing all taxes down to that criminally low rate. Whereas now fund managers are getting away with murder, under this proposed plan, they would get away with mass murder.
Illinois is also not the only state to attempt to address carried interest at the state level. It is the only state to date that has enacted change. A measure to close the carried interest loophole on the state level has been introduced in five states as an interdependent compact. In spite of the critical revenue it would bring in (not to mention that the only opponents are acting purely out of self-interest) it has not managed to get off the ground. While some members of the state legislatures have taken steps in the right direction, none has been able to make the impressive push of Senator Biss.
As legendary venture capitalist and Patriotic Millionaire Alan Patricof said in his New York Times article, “Our current political and cultural environment is marred by a toxic belief that the country’s economic order is rigged against ordinary Americans — that the world of high finance unjustly supersedes their rights, needs and wants . . . It is time to demonstrate a little more patriotism, and a greater sense of fairness. Yes, even if it affects our pocketbooks.”
This is exactly why State Senator Biss has taken on carried interest. “There is no reason for the State of Illinois to aid billionaires in finding ways to shelter their income,” he said. “Everyone should have to pay their fair share of income taxes. And if lawmakers in Congress won’t help us right this wrong, we’ll have to do it ourselves.” Illinois is on brink of its third year without a budget and is in dire need of revenue. It is clear that anyone in opposition to this bill is refusing to put money into state coffers and is instead lining their own. We commend Senator Biss for stripping back bureaucratic hurdles and actually putting action behind his promises.