By Eric Schoenberg on NJ.com
New York Gov. Andrew Cuomo threw down the gauntlet in his State of the State address this month – promising that he would close the carried interest loophole if Congress wouldn’t.
It’s time for Gov. Phil Murphy to do the same in New Jersey.
The carried interest loophole is a piece of the tax code that allows investment managers – some of the richest people on Earth – to cut their tax bill in half, so much so that they pay a lower tax rate than their secretaries and janitors.
Simply put, carried interest fees are performance-based bonuses. When an investment fund does well, fund managers make more money. When it does poorly, they make less. It’s no different than any other job with performance incentives – but because of the carried interest loophole, fund managers are able to classify their income as capital gains, cutting their tax rate by as much as twenty percent.
When arguing for their tax break, fund managers claim that their earnings are capital gains because they come from investments, neglecting to mention that they come from other people’sinvestments. The entire reason capital gains tax rates are lower than income tax rates is to encourage people to invest and risk their own money, but the beneficiaries of the carried interest loophole are just managing other people’s money – with none of the risk.
Closing the loophole shouldn’t be considered a tax increase, but a tax correction. Fund managers have gotten by with paying an absurdly low rate for years, and now they should be required to pay taxes at the same rate as their secretaries or janitors.
Of course, the finance industry will argue that closing the loophole will impact job creation and economic performance, but the loophole doesn’t impact investment – just the taxes on the fees that fund managers charge. In an industry as competitive as private equity, managers can’t suddenly start charging higher fees to compensate, because they’d just drive their investors away. They also wouldn’t be able to just move to another state to avoid New Jersey taxes, because the law to close the loophole would go into effect only after a similar law is passed in all neighboring states with significant private equity footprints, including New York, Massachusetts, Connecticut and Rhode Island.
New Jersey would benefit immensely if the loophole was closed. Closing the carried interest loophole could raise over $100 million dollars a year for New Jersey, nearly all of which will come from millionaires who can most afford to pay higher taxes. That’s $100 million every year for job creation, better schools, affordable housing, and infrastructure – all from closing just one loophole to raise taxes for the ultra-wealthy.
This is a no-brainer tax decision.
Murphy said multiple times on the campaign trail that New Jersey should close the carried interest loophole. In fact, he made it a major part of his tax policy proposal. If Governor Murphy is serious about following through on his promises, this is a perfect opportunity for him to put his money where his mouth is and make 2018 the year New Jersey closes the carried interest loophole.
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