New York Cans Hedge Fund Tax Hike Plan

Jul 27 2010 | 12:48pm ET

It was on, and then off, and then on again. But a proposed tax hike on hedge fund managers who work in New York and live out-of-state appears to be off once again.

New York Gov. David Paterson has removed a measure that would have taxed performance fees earned by out-of-state managers as ordinary income, rather than capital gains. Closing the so-called carried interest loophole has previously been proposed by the U.S. Congress, but has failed to pass both the House of Representatives and Senate.

The tax hike would have raised $50 million to help close New York’s yawning $9.2 billion budget deficit. But it also sparked concerns that it would cause hedge funds to leave the state, and was the centerpiece of a campaign by Connecticut Gov. Jodi Rell to lure them across the state line.

Paterson has said he opposes the tax increase but included it in the budget proposal because the state legislature refused to consider other revenue-raising measures. However, his press secretary now says he’s outright opposed to it.

“The provision was removed and will be removed again when the governor submits a proclamation for special session for Wednesday when he calls the legislature back,” Morgan Hook said.

“I am encouraged that our legislative body in New York was open-minded enough to see the likely consequences of an ill-conceived piece of legislation before it was too late," New York Hedge Fund Roundtable president Timothy Selby said. "This could have been the commencement of a tipping point that would have been disastrous for New York City.”

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