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 four percent unincorporated business tax. Carried interest of unincorporated businesses is currently exempt under the city’s unincorporated tax rules.
“We need to pay for the cost of keeping civilisation running, and everyone has to pay their fair share,” a Working Famlies 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, proposed a similar plan in April. James Parrott, deputy director and chief economist with the Fiscal Policy Institute, said there was 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 last year's failed federal attempt to pass legislation increasing the tax on carried interest from 15 percent to the ordinary income rate, which is as high as 35 percent.
The Working Families spokesman said the proposal had no chance of being approved by the Republican-led state legislature, but that could change if the legislature changes party hands on election day (4 November).
However passage of such a tax increase would prompt private equity firms to move outside of New York City, 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 was a nexus of private equity activity and had a “fabulous pool of talented investment professional”, but other cities had emerged as centres of financial activity as well, such as Dubai and London.