Illinois Dems Target Carried Interest Loophole

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By Michael J. Bologna

Legislation addressing the so-called “carried interest loophole” is gaining momentum in Illinois after the release of data finding the measure would generate $473 million for the cash-starved state.

Grassroots Collaborative, a coalition of labor unions and human service organizations, April 19 touted passage of a new privilege tax on private equity firms, hedge funds and other financial organizations with the release of “ Illinois Billionaires and Their Lucrative Loophole.” The report, released in conjunction with Hedge Clippers, a similar coalition, blasts a small group of wealthy investment managers for failing to pay their fair share of state taxes. The report calls on the Illinois General Assembly to close the loophole and fund state programs hampered by a budget crisis that has dragged on for almost two years.

“Illinois’s private equity and hedge funds are conservatively estimated to be earning $4.8 billion per year in under-taxed carried interest,” the report concludes. “A state bill to recapture this revenue at the ordinary income level has strong sponsorship in both houses of the state legislature, and it would raise at least $473 million each year for schools, health care and essential public services in Illinois.”

The report singles out several billionaires for scrutiny, including Ken Griffin, founder of Citadel LLC; Michael Sacks, chairman and chief executive officer of Grosvenor Capital Management LP; and Sam Zell, founder of Equity Group Investments.

But one name sticks out from the pack—Bruce Rauner, the former chairman of the Chicago-based private equity firm GTCR LLC and the Republican governor of Illinois.

“Rauner dodged paying millions in taxes by taking advantage of the carried interest loophole on income he received as a private equity firm executive,” the report states.

Privilege Tax

Grassroots Collaborative, which includes the Chicago Teachers Union, the Illinois Hunger Coalition and the Service Employees International Union, called for passage of H.B. 3393 or a companion bill in the Senate, S.B. 1719.

The two bills would amend the Illinois Income Tax by imposing a 20 percent privilege tax on partnerships and S corporations “engaged in the business of conducting investment management services, until such time as a federal law with an identical effect has been enacted.” The bills stipulate that the new tax could only be effective if Connecticut, New Jersey and New York also enact laws having an identical effect.

The measure is gaining support in the House and Senate, both controlled by Democratic lawmakers. The House version has 21 cosponsors and passed the Revenue and Finance Committee on March 23 by a 7-4 party-line vote. The Senate version is being sponsored by Sen. Dan Biss (D), who recently announced plans to challenge Rauner for governor in 2018.

“Since the Trump administration and Republican Congress aren’t willing to solve this problem, it’s time for us to fix it on the state level,” Biss said in a statement. “Instead of taking advantage of a tilted playing field, these billionaires should be contributing their share to make our state government work.”

Backlog of Bills

Nathan Ryan, a spokesman for Grassroots Collaborative, conceded Rauner would be a major roadblock if the bill finds its way out of the General Assembly. At the same time, he said lawmakers are looking for revenue to bridge a fiscal crisis that includes a $12 billion backlog of unpaid bills.

“We feel very optimistic about this bill,” Ryan said. “Illinois is desperate for money right now. It not only makes our tax system more fair, but it generates significant revenue the state needs right now.”

The legislation is opposed by the Illinois Venture Capital Association and other business organizations. The association recently called on its members to lobby their elected representatives.

“The Chicago Teachers Union and their legislative allies contend the state should find revenue to address its fiscal challenges and instill more ‘fairness’ in the tax code by taxing the capital gains income of investment managers including partners of private equity firms,” the venture capital group said. " Similar efforts are underway in Connecticut, New Jersey, New York and Massachusetts.’'

To contact the reporter on this story: Michael J. Bologna in Chicago at mbologna@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the report is at http://src.bna.com/n69.

Text of H.B. 3393 is at http://src.bna.com/n7a.

Text of S.B. 1719 is at http://src.bna.com/n7b.

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