The Hill: Memo to Congress: On tax fairness, follow the lead of states and cities

By Leo Hindery Jr and Tal J Zlotnitsky on The Hill

As millions of Americans race to complete their tax returns by April 15, let’s remember that not everyone is worried about paying taxes.

Indeed, too many wealthy Americans are paying far too little in taxes, and thanks to Congress they’re going to pay even less this year and in years to come.

Last December’s massive overhaul of the federal tax code was little more than a handout to millionaires and multinational corporations that’s going to cost our government $1.5 trillion while leaving the middle class and working people with crumbs. Our tax code is now more beneficial to the rich and more punishing of the poor and the middle class than at any other time in modern history.

But despite Congress’ gleeful disregard for the very concept of tax fairness, a growing number of state and local lawmakers are taking action to defend it. In city halls and state houses all across the nation, these legislators are fighting back against a tax code that prioritizes billionaires over small businesses. And nowhere is that fight clearer or more pressing than in the debate over the carried interest loophole.

It’s one of the most illogical and unjustifiable loopholes ever. And it’s resulted in massive sums of uncollected tax revenue for decades. It benefits a small number of incredibly wealthy private equity and hedge fund managers, some of whom are billionaires.

The carried interest loophole is the purposeful mischaracterization of the bulk of these fund managers’ incomes as capital gains when by every fair measure this income is ordinary income. These fund managers, some of the wealthiest people in the world, are able to cut their tax bills nearly in half by paying the capital gains rate of 23.8 percent instead of the top ordinary income tax rate of 37 percent.

The capital gains tax rate is significantly lower than the income tax rate for a very good reason: the government believes that incentivizing real investment and real risk-taking spurs growth. However, fund managers invest no money of their own and they take on no personal risk.

They are simply managing money, no differently than the millions of other Americans who every day manage businesses from the very small to the very large and who pay the ordinary income tax rate on their earnings, just like more than 90 percent of all American taxpayers.

One of us is a business owner in Washington, D.C., while the other is someone who has personally benefited from carried interest loophole in New York.

But we both agree: it’s long past time to scrap this ridiculous loophole.

During his presidential campaign, Trump promised to close the carried interest loophole but his tax plan passed by Congress left it wide open.

States and cities are doing what Congress should have done long ago – they’re advancing bills in their legislatures to tax the carried interest income of hedge fund and private equity companies. Currently, there are active campaigns to close the carried interest loophole in New York, California, New Jersey, Connecticut, Rhode Island, Massachusetts, Maryland, Virginia, Illinois, Minnesota and Washington, D.C.

Ohio, Pennsylvania, Delaware are also eyeing similar legislation on carried interest.

An increasing number of states and cities involved in the broader political resistance to Trump’s agenda are clearly fighting back on taxes, too. They know that taxing carried interest will raise substantial revenue for investment in schools, health care, housing, jobs and clean-energy infrastructure – and help minimize the impact of looming federal budget cuts.

A recent report from researchers at the Hedge Clippers campaign revealed that “state action reveals that state action on carried interest could recapture many billions of dollars across the country, with hundreds of millions or billions for each state.” The same report showed that Washington, D.C., alone could raise $152 million a year by taxing carried interest.

We can and should be spending these billions on making this country a better place for everyone to live, not on padding the bank accounts of a hedge fund and private equity fund managers.

Congress may have been convinced by swarms of private equity-funded lobbyists to ignore carried interest in its December tax code overhaul, but they can’t get away with it forever, especially at a time of growing anger over Trump and Washington’s continued dysfunction.

It’s time for Congress to follow the lead of states and cities, and recognize that the American people deserve a government and a tax code that work for them, not just for the powerful and the wealthy.

Read full article on The Hill