New York Hedge Fund Tax Hike Stalls

Jul 1 2010 | 2:04pm ET

With Connecticut wooing and New York City Mayor Michael Bloomberg stewing, New York lawmakers have—once again—put off consideration of the state’s three-month-late budget that would have increased taxes on out-of-state hedge fund managers working in New York.

The legislature will return to the matter next week, continuing negotiations with Gov. David Paterson.

New York is currently facing a $9.2 billion budget deficit.  Paterson and New York Assembly Speaker Sheldon Silver had proposed increasing taxes on out-of-state hedge fund managers by some $50 million a year by doing what the U.S. Congress has so far failed to do: close the carried-interest loophole.

Under New York’s “commuter tax,” hedge fund managers who work in the state—the world’s largest hedge fund center—but live in New Jersey, Connecticut or elsewhere do not pay any income tax on money earned through performance or incentive fees. The plan could have more than doubled the amount of New York state tax that those managers pay.

But faced with opposition from the hedge fund industry—which warned the tax hike could push managers to leave the state—as well as efforts by Conn. Gov. Jody Rell to lure those managers and bitter words from Bloomberg, Paterson has abandoned his support for the measure.

“We are not favorable to this,” he told WWOR radio this morning. “We did it because we couldn’t get the Legislature to do the other revenue raisers that we thought were far more constructive.”

Rell sent a letter yesterday to New York Hedge Fund Roundtable President Timothy Selby, announcing that “Connecticut welcomes you!” and urging New York hedge funds to move to the tax-friendlier jurisdictions of the Nutmeg State, just over the border.

“I think it’s the best thing that ever happened to Connecticut,” Bloomberg said of the proposal. “I can’t imagine why every hedge fund won’t pick up tomorrow and leave.”

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