On Tuesday, May 30 Patriotic Millionaires Chuck Collins delivered this testimony to the Rhode Island Legislature, urging them to close the carried interest loophole.
My name is Chuck Collins and I’m a member of the Patriotic Millionaires. I’m an investor, researcher, and the great-grandson of the meatpacker Oscar Mayer. I’m deeply concerned by the extreme inequalities of income, wealth and opportunity that have opened up in U.S. society.
The 200 members of the Patriotic Millionaires have been pressing for several years at the national level for an end to the carried interest loophole. Many of our members are private equity investors and managers who believe this loophole exists only because of the corrosive power and influence of big money lobbying. In the face of Congressional inaction, the Patriotic Millionaires support states taking action.
I live in Massachusetts and have worked with members of the Massachusetts Legislature to introduce a companion bill, similar to what is before the General Assembly. It seems important that a number of states act in consort to close this egregious loophole.
We are concerned about fundamental fairness. Other professions do not get to treat fees as capital income. Why should one group of powerful and well-connected financial industry professionals be treated differently. Closing this loophole would enable states such as Rhode Island and Massachusetts to gain hundreds of millions of dollars acting where the federal government has failed.
By levying a 19 percent “fairness fee,” Rhode Island could generate an estimated $40 million per year to invest in infrastructure, education and other fundamental needs. Massachusetts could generate over $500 million. During the election, candidates Trump and Clinton both called for closing the “carried interest loophole,” a legal fiction used by wealthy financiers to lower their federal tax rates below those paid by many working Americans. As President Trump backtracks on campaign promises to crack down on Wall Street, state-based lawmakers and activists are taking matters into their own hands.
On May 23, the Illinois State Senate became the first legislative body to pass a bill to end one of the most outrageous examples of Wall Street privilege – the so-called “carried interest” loophole. This loophole allows private equity and hedge fund managers to claim most of their earnings as capital gains rather than ordinary income, cutting their tax bill nearly in half. This means some of the wealthiest Americans pay a lower tax rate than millions of middle-income workers. The bill would impose a “privilege tax” at a rate of 20 percent on the fees earned by managers of private equity and hedge funds.
According to Michael Kink of the Strong Economy for All Coalition, there are good prospects that a New York carried interest bill could move forward in the near future. Legislators have introduced similar bills in five other states (New Jersey, Connecticut, Rhode Island, Massachusetts, and Maryland) and activists are developing campaigns in several more. The Illinois legislation states that the tax would disappear if the federal government eliminated theloophole at the national level. Senator Tammy Baldwin (D-WI) and Representative Sandy Levin (D-MI) have introduced bills that would d ojust that. But the chances of passage in the near future are slim. In Illinois, the bill is expected to pass through the House chamber before the regular legislative session ends on May 31. Then they will press Republican Governor Bruce Rauner, a former private equity fund manager, to sign the bill into law.
Closing the loophole would save the federal government an estimated $18 billion per year, according to an analysis by law professor Victor Fleischer. State legislatures could pass legislation to tax the carried interest income of hedge fund and private equity partnerships headquartered in their respective states at the rate of ordinary income. Using a conservative methodology for estimating the potential annual revenues, we project that state action could recapture hundreds of millions of dollars.