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3/16/2017 Strong Economy for All Coalition announces campaign to end the carried interest tax loophole
The coalition will support legislation to end this loophole and ensure hedge fund managers pay their fair share.
STATE HOUSE – The Strong Economy for All Coalition held a press conference at the State House today announcing their campaign in support of bills 2017-S 0259 and 2017-H 5563, which would establish a 19-percent fairness fee for investment management services in order to tax the carried interest income of hedge fund and private equity investors as traditional earned income – and which would only take effect if similar legislation also passes in New York, Connecticut, Massachusetts, and New Jersey – states that have the highest concentration of hedge fund and private equity managers. The legislation is sponsored by Sen. Adam J. Satchell (D-Dist. 9, West Warwick) and Rep. Aaron Regunberg (D-Dist. 4, Providence).
The term “carried interest,” which hearkens back to the days when ship captains would receive a share in the gains of selling cargo, is now applied to partnership managers who collect large fees from their clients whose money they invest. At issue is how those fees are taxed. Hedge fund managers treat the fees as capital gains so they can pay a tax of 20 percent, whereas ordinary income is taxed at a rate of up to 39.6 percent.
“Labeling those fees as capital gains is a tremendous stretch,” said Representative Regunberg. “The reason the capital gains tax is so low is because of the risk involved in investing your own money. But these managers earn their fees from investing other people’s money rather than their own. As a result, we have a loophole where billionaires get a lower tax rate than kindergarten teachers and truck drivers.”
The national debate has focused on whether carried interest should be treated as capital gains or ordinary labor income. Senator Satchell’s and Representative Regunberg’s legislation will close the loophole by evening out the taxation playing field.
“Carried interest is compensation for providing services,” said Senator Satchell. “It should be taxed as labor income, just like any other payment for services. Some fund managers are extremely wealthy and should not pay lower tax rates on their compensation than regular wage and salary workers. Since Congress has been slow to address this problem, it’s now up to the state legislatures.”
Chuck Collins, member of the Patriotic Millionaires, heir to the Oscar Mayer fortune, and author of Born on Third Base, stated, "The carried interest deduction only exists because wealthy and powerful money managers have the power to get their way in Congress. States like Rhode Island have a responsibility to address this inequity in the federal tax system —and capture some of the revenue for public investments."
"The carried interest tax loophole is indefensible,” stated Morris Pearl, Chair of the Patriotic Millionaires and former managing director of BlackRock Investments. “It is totally unfair that a private equity manager who directs other people to invest money gets a tax rate that is lower than all of the other Americans who work for a living by using a preferential rate meant for actual investors. This loophole has continued far too long, allowing the wealthy to put more money into their own pockets while regular Americans pay the price. This is simply not fair. Rhode Island has a chance to return millions of dollars to the state and show that the government is controlled by the people, not Wall Street.”
Closing this loophole would save an estimated $18 billion per year at the federal level. Rhode Island and other states could gain billions of dollars in new revenue by taxing the carried interest income of hedge fund and private equity partnerships headquartered in each state. Rhode Island’s private equity and hedge funds earn $402 million per year. A state bill to recapture fair-share tax rates would provide an estimated $40 million per year for Rhode Island – money that could go straight into funding Rhode Island’s most critical needs, like school infrastructure, higher education, and more.

For more information, contact:
Meredyth R. Whitty, Publicist
State House Room 20
Providence, RI 02903
(401) 222-1923