Coalition attempts to close private fund manager U.S. tax loophole

NEW YORK, March 7 (Reuters) - A group of liberal political activists, lawmakers and “patriotic millionaires” are hoping to end what they call “one of Wall Street’s most beloved tax loopholes” in New York and other states.

At issue is so-called carried interest, or how the share of profits from an investment paid to managers of private equity and other funds is taxed. That money, after adjustments, is treated as a capital gain and taxed at a rate significantly lower than the one for the income of wage earners. The capital gains rate applies to investments held for one year or longer.

Opponents of carried interest argue that the money is a fee that should be taxed as ordinary income.

Carried interest has long been criticized by some politicians, traditionally Democrats such as Hillary Clinton, but also recent Republican presidential candidates Donald Trump and Jeb Bush. Still, efforts to change the tax treatment nationally have stalled in Congress for years.

On Monday, New York state assembly members Jeffrion Aubry and Sean Ryan proposed legislation that would essentially charge the managers of private equity, venture capital and hedge funds for what they would have paid if the rules were different nationally. The extra revenue would go to state causes such as public schools, infrastructure and housing.

The announcement, in Albany on Monday, was made in coordination with the Hedge Clippers, a liberal group that works to challenge what it sees as hedge fund industry excess, and the Patriotic Millionaires, a group of wealthy individuals who have supported causes such as a $15 an hour minimum wage.

That effort on higher worker pay, according to a spokesman for the coalition, is a model for this campaign: if it does not work nationally, try it locally.

Changing carried interest rules in New York would generate an estimated $3.7 billion in revenue for the state, according to a report by the Hedge Clippers.

Similar legislative efforts are planned in California, Connecticut, Illinois, Massachusetts, New Jersey and Pennsylvania, according to a press release from the activist coalition.

The Private Equity Growth Capital Council, a trade association, defends carried interest, saying it spurs long-term investment.

“This tax policy encourages the risk taking that is required to start and grow companies,” the group states on its website. “Changing the taxation of carried interest would upend a long-standing, successful policy that has helped America prosper for more than 100 years.” (Reporting by Lawrence Delevingne; Editing by Steve Orlofsky)