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Commentary By Diana Furchtgott-Roth

New York Legislators Enter Dangerous Territory with Investment Tax Bill

Economics, Economics, Cities Finance, Tax & Budget, New York City

A 19% tax on carried interest would throttle investment partnerships

Some New York state legislators want to take over federal taxation of carried interest. This is an important development to watch.

“NY legislators want to raise the taxes on carried interest to federal ordinary income tax rates... for everyone all over the world who get returns from partnerships with a business connection to the Empire State.”

Rather than Congress and the president determining federal tax law, New York, home to many investment partnerships, now wants to increase state taxes on capital gains and keep the revenue for itself. New York already taxes capital gains and ordinary income equally, but apparently that’s not good enough.

Carried interest on real estate, private equity, venture capital and all other investments in capital assets has been taxed as capital gains since the birth of the tax code in 1913. The top rate on carried interest is 24% (the top capital gains rate) rather than 43% (the top rate on ordinary income). Carried interest is a capital gain because it represents the profit realized from the sale of a capital asset.

The New York legislators want to raise the taxes on carried interest to federal ordinary income tax rates, not just for New York residents, but for everyone all over the world who get returns from partnerships with a business connection to the Empire State.

Bills in the New York State Assembly and Senate would increase taxes on profits earned by venture capital, private equity and other investment partnerships by imposing a 19% additional tax — the difference between the tax on capital gains and the tax on ordinary income — on those capital gains.

If the bill became law, New York would likely see part of its financial sector leave for other states...

Read the entire piece here at WSJ's MarketWatch

This piece originally appeared in WSJ's MarketWatch