States working to close carried interest tax loophole

New York is proposing state legislation that would increase taxes on managers of hedge funds and other private investment partnerships, after Congress and President Trump failed to do so via the recent federal tax bill.

Bottom line: New York only will move forward if it can get agreement on similar bills in Connecticut, Massachusetts, New Jersey and Pennsylvania.

Facts Matter: Taxing carried interest

Carried interest is currently treated as a long-term capital gain by the federal government, which means it is generally taxed at 20%. Ordinary income for top earners is taxed at a 37% clip. The proposed bill in New York, therefore, would basically be a 17% tax increase that Gov. Andrew Cuomo calls a "fairness fix."

It would apply to certain investment profits earned not only by hedge fund managers, but also by managers of private equity, real estate and venture capital funds. There already is a small capital gains surtax in New York City, but state budget director Robert Mujica tells Axios that the bill should not end up costing a fund manager in Manhattan more than one in Buffalo.

"We've been talking about this for a while, but are doing it now because this is the time when the whole tax code is getting looked at," adds Mujica, who says he expects carried interest to be a standalone bill, rather than part of a broader package that is being designed to mitigate unfavorable changes to state and local tax deductions.

But, again, New York wants regional buy-in before moving. "We're talking to the other states now," Mujica says.

• It's worth noting that one of the states (Massachusetts) is led by a governor who previously worked for a venture capital firm, while another (New Jersey) has a governor whose prior career at Goldman Sachs included regular work with hedge funds.