New York Private Equity Tax

New York City Private Equity Tax on Carried Interest

New York City Council members appear open to raising the tax on carried interest earned by local private equity managers by 20%, a move that would leapfrog the national debate over taxing carried interest.

According to the Working Families Party, the majority of New York City Council members would support raising the tax on carried interest earned by local private equity firm managers from 15% to 35%. This is a hotly debated national issue, as many view private equity and hedge fund managers earning 35% of the fund's profits to be unfair to investors and even to the public. The claim is that carried interest is an unfair loophole that causes an unbalance in tax system and hurts middle- and working class Americans.

Working Families estimates raising the tax would net $225 million each year for New York City; however the complaint is not likely to be acted upon anytime soon--if ever. The national debate over taxing carried interest is ongoing and so far nothing has been changed in the treatement of private equity and hedge fund manager's carried interest. To change New York City's tax toward carried interest would be surprising, as it is rare that a local or state tax system would deviate from national tax code.

Potential Issues With Locally Taxing Private Equity

In my personal opinion, there are several potential obstacles to New York taxing local carried interest: federal tax code, Mayor Michael Bloomberg and staunch opposition by private equity firms and hedge funds.a

The first obstacle is the fact that the federal tax code has not been changed to increase taxes on carried interest. As the President of Robert Willens LLC., a tax and accounting law firm, recently said "I would say the chances are about as close to zero as could be possible. State and local taxes are geared to the federal code. They almost never deviate." It would be highly irregular for New York City to do this.

The second obstacle, is the current Mayor Michael Bloomberg. The Mayor is known first as a very successful businessman and while it's unfair to say that he would favor business interest, but it's not likely he would go out of his way to hurt financial institutions either. Although his term is coming to a close, he is the incumbent candidate for Mayor next election. (Last week, the City Council passed an unprecedented vote to overturn the term limits, allowing Bloomberg a third term.)

Lastly, private equity firms and hedge funds have been able to resist national pushes to raise the tax on carried interest, so far. With all the resources and money available to the private equity and hedge fund industries, it is difficult to push such an unpopular tax on them. Additionally, forcing an unpopular cut in local private equity and hedge funds profits would potentially cost the city revenue if the firms changed location to avoid the tax.

The debate of taxing carried interest is ongoing and as political leadership shifts along with changes in the economy it's hard to predict which side will win.

Source: Dealscape

*Note: This article in no way endorses a particular position or represents financial advice.

Tags: New York Private Equity Tax, Private Equity New York, New York Private Equity, New York Private Equity Tax system, Carried interest, New York private equity firms, New York Carried interest tax, private equity and hedge funds carried interest

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