New York state may tax out-of-state hedge fund execs

NEW YORK (Reuters) - Recession-hit New York could raise an extra $50 million a year by collecting income taxes from people who work for hedge funds in the state but live elsewhere, according to a legislative plan to raise revenue.

The new plan would tax so-called carried interest.

A spokesman for Democratic Assembly Speaker Sheldon Silver said by telephone on Monday that it means hedge fund managers would be treated the same way as other commuters.

Congress also has considered taxing carried interest -- profits gleaned by managing assets -- at ordinary income rates -- much to the dismay of hedge fund and private equity titans.

But last week, the federal proposal collapsed with a bill extending unemployment benefits. So for the moment, investment managers still pay only the 15 percent federal capital gains tax on their profits.

Democratic Governor David Paterson and New York lawmakers have balked at broad-based tax hikes after last year, when the top state income tax was raised to 8.97 percent for people whose annual earnings top $500,000.

Making hedge fund managers pay the state income tax is one of several options the Legislature devised after rejecting several of Paterson’s proposed revenue-raisers, from letting grocers sell wine to raising tuition at public universities.

With the recession shrinking New York’s tax revenue, the Democratic-led Legislature and governor are still feuding over how to fill a $9.2 billion deficit nearly three months after missing the deadline for enacting a $135 billion budget.

So far, New York has not had to shut the services people need, from police to healthcare, because the Legislature each Monday has enacted Paterson’s weekly emergency spending bills.

But this time, the Legislature rejected Paterson’s emergency spending bill because he inserted more of the full-year cuts he has been including in the past few measures.


On Monday, the Assembly and Senate in a joint statement said they will not accept Paterson’s latest measure because it was more than 30 days past the governor’s deadline for submitting amendments to his budget plan.

The Legislature plans to approve a bill on Monday that it said includes enough money to avert a government shutdown; on Tuesday, it expects to enact a revenue bill that includes a mix of its revenue-raisers and Paterson’s proposals.

This list includes charging the state’s 4 percent sales tax on clothing and footwear that costs less than $110, starting in October, and cutting in half the amount of charitable contributions allowed as itemized deductions to 25 percent for people with New York adjusted gross income above $10 million a year.

The Legislature plans to defer some business tax credits, restrict property-tax rebates for wealthy individuals, and offer film makers an extra $420 million of credits each year.

But Paterson says he will veto extra funds the Legislature plans to approve, including $600 million for schools.

Saying lawmakers must enact a balanced budget, the governor on Sunday told New York City reporters: “I do not want to come back to balance an unbalanced budget the way we did last year.”