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A subcommittee in the Connecticut Legislature heard testimony April 11 from the group called Patriotic Millionaires on a bill that would end the carried-interest tax advantage that benefits private-equity and hedge-fund managers.
The bill, H.B. 7313, is before the Finance, Revenue and Bonding Committee. If passed, it would impose “a 19 percent surcharge on income derived from investment management services"—the difference between the 20 percent capital gains tax rate that hedge-fund and private-equity managers currently pay and the 39.6 percent tax rate for ordinary income.
Gov. Dannel P. Malloy (D) has expressed reservations about the measure, saying that with a stagnant economy and residents already leaving the state, now might not be the time to close what some call a tax loophole.
Even if the bill passes, it wouldn’t go into effect until similar legislation is enacted by New Jersey, New York and Massachusetts. Lawmakers worry that taking the step would prompt companies to flee the state in favor of states that still allow it.
A bill with a similar provision about implementation in other states remains in committee in the New York Senate. Massachusetts and New Jersey haven’t introduced bills on the issue.
Among those testifying for the Connecticut proposal were numerous citizens, representatives of labor unions, the Connecticut Citizen Action Group, Connecticut Voices for Children, and Patriotic Millionaires, a Washington-based advocacy group of 200 high-income people.
“The carried interest tax loophole is the poster child of egregious tax loopholes that benefit a tiny number of wealthy and well-connected people. This has been criticized from the left and the right, by Republicans and Democrats, by every major presidential candidate and tax policy expert,” Morris Pearl, chairman of the group, said in his testimony. “Nevertheless, it persists. The current Congress is not inclined to do anything to assess the rich their fair share of the nation’s tax burden.”
Bruce McGuire, chairman of the Connecticut Hedge Fund Association, an organization that advocates for private funds operating in the state, testified in opposition to the bill. The state is a “global leader in investment management” and the third-largest center of hedge funds in the world, with over 400 funds managing $750 billion, he told the committee.
“This position did not come about through government programs, but through a combination of organic factors, including the state’s income tax policy,” he said.
Closing the loophole would cause investment firms to flee to other states, or even other countries, he said. Florida is actively courting the industry, he said, and China “would love to have a part of this industry in their country.”
Also opposed were the Financial Services Institute and the Connecticut Business & Industry Association, which said in a joint statement that the measure would “increase the cost of financial services, jeopardize retirement security for older Americans, impose a financial burden on Main Street Americans trying to save for the future, and force small businesses to become tax collectors for the state.”
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Text of H.B. 7313 is at http://src.bna.com/nRb.
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