A proposal to tax the carried interest of unincorporated businesses in New York City is supported by a majority of city council, but opposed by Mayor Michael Bloomberg and must ultimately be approved by the Republican-led state legislature.
The proposal, put forth by the left-wing political group the Working Families Party, would make carried interest taxable under the city’s 4 percent unincorporated business tax. Carried interest of unincorporated businesses is currently exempt under the city’s unincorporated tax.
“We need to pay for the cost of keeping civilisation running, and everyone has to pay their fair share,” a Working Families Party spokesman said. “Carried interest is not seen as standard income. It’s bizarre, it’s some weird special benefit given to the [private equity] industry.”
Think tank the Fiscal Policy Institute put forth a similar proposal in April. James Parrott, deputy director and chief economist with the Fiscal Policy Institute, said there is no reason carried interest should be exempt from the unincorporated tax in New York City.
Will this cause talented money managers to operate outside of New York City?
The New York City carry tax issue is separate from failed legislation at the federal level that last year went before Congress to propose changing the tax on carried interest from the capital gains rate at 15 percent to the ordinary income rate, which is as high as 35 percent.
The Working Families spokesman said the proposal has no chance of being approved by the Republican-led state legislature, but that could change if the legislature changes party hands on election day.
Passage of the tax could increase the likelihood that private equity firms will move outside of New York City, especially to financially struggling areas desperate for job creation, according to Brian Rich, managing partner with New York-based Catalyst Investors.
“The question is, will this cause talented money managers to operate outside New York City?” Rich said. “Other parts of the country will be hurting and looking for people to create jobs.”
Rich said New York is a nexus of private equity activity and has a “fabulous pool of talented investment professional”, but other cities have emerged as centers of financial activity as well, like Dubai and London.
Robert Stewart, spokesman for the Washington, DC-based Private Equity Council, said the council supports leaving the tax structure the way it is.
“We believe the current tax treatment of carried interest is the correct tax treatment,” Stewart said.