For the first time ever, closing the carried interest loophole has been added to a state budget. Governor Cuomo of New York revealed this egregious aspect of the tax code is on the chopping block in his Tuesday, January 16 address.
The carried interest loophole is “a federal tax that allows some hedge fund managers to pay a lower tax rate on revenue from investments,” according to nytimes.com. In order to incentivize continued investments in our economy, investors are taxed 20% on capital gains. Through the carried interest loophole, hedge fund managers found a way to also pay 20% in taxes on their fee income, which is not capital gains. Thus, they are avoiding the 39.6% marginal rate.
Although Trump campaigned on the promise to remove the carried interest loophole, the GOP tax plan that passed in December kept it in place. Now it is up to the states.
PA, NJ, NY, and CT would be members of a multistate compact to remove the carried interest loophole and reclaim their tax revenue for each state’s use, rather than Washington. The compact advocates instituting a 19% fee to reclaim the difference in taxes the loophole enables Wall Street to withhold.
This not going to be an easy feat, even if it is harder to take something out than putting something into a state budget. Just like at the federal level, monied interest will be lobbying until April 1, the day the budget must be ratified, to stop the closing of the carried interest loophole. If it weathers intense lobbying by those who’d rather pocket the money than improve the state, New York will raise an extra $3.5 billion a year.
“You can’t possibly get anywhere near where you want to be on education and health care unless you raise revenues,” Gov. Cuomo said. “It’s just too big a deficit.”
With every budget or piece of legislation, there will be winners and losers. Rarely, however, is public policy so utilitarian in its goals as with the impending demise of the carried interest loophole.