Some NY hedge fund execs may escape new tax

NEW YORK (Reuters) - Hedge fund executives who commute from Connecticut or New Jersey to offices in New York might escape having to pay income taxes on their investment profits after all, Governor David Paterson said Thursday.

Another way of extracting more money from the ultra-rich -- halving the state’s charitable deduction to 25 percent for people whose yearly incomes top $10 million -- also might fall by the wayside, the Democratic governor told WOR radio.

“It might be far more responsible for us to revisit that issue, particularly about the hedge fund managers, because according to Mayor Bloomberg, and he told me this yesterday, all they have to do is basically change their addresses,” Paterson said.

New York’s Democratic-led Assembly late Thursday was expected to approve both tax hikes as part of a bill to raise about $1 billion to help close a $9.2 billion deficit.

But the Democratic-run Senate, put off any vote on the bill though it is the last plank of the state’s almost $136 billion budget, which is three months late.

Though Congress so far has failed to increase taxes on carried interest -- the profits hedge funds and private equity firms earn from their investments -- New York residents already pay ordinary income taxes on this income.

Though the state’s top income tax rate of 8.97 percent is about six percentage points lower than the 15 percent rate that prevailed from 1969 to 1977, Connecticut Governor Jodi Rell on Wednesday seized on the prospect of higher New York taxes to urge hedge funds to move to her state.

Over the years, Connecticut has succeeded in attracting hedge funds and private equity firms to Stamford, which otherwise might have been expected to settle on Wall Street.

Mayor Michael Bloomberg also has said New York’s proposed tax hike is a win for Connecticut, whose top income tax rate is slightly lower at 6.5 percent.

New Jersey, which attracted financial power houses to Jersey City, also might gain. Though its top income tax rate matches New York’s, private equity and hedge fund executives would be taxed twice on the same income if they commuted to New York from either New Jersey or Connecticut, under the proposed bill.

Reporting by Joan Gralla; Editing by Diane Craft