Governor David Paterson and the Democratic leaders of the New York State Legislature have agreed to impose $50 million in new taxes on non-resident partners in New York-based hedge funds.

Here’s how the provision is described in the memo accompanying the governor’s revenue bill:

Non-Resident Hedge Fund Manager Carried Interest
This bill would tax the income a partner (whether a corporation or an individual) receives for the performance of investment management services they provide to a partnership hedge fund, but not tax income earned on funds invested by the service partner. Therefore, it would equalize the tax treatment of income from such services whether the partner is a New York resident or nonresident.

The complete language of the new tax provision can be found on pp. 250-256 of the governor’s proposed bill. Matching language is in the Legislature’s version of the revenue bill.

In effect, this is New York’s answer to the ongoing congressional debate over taxation of carried interest. On the federal level, it’s a much bigger deal for affected funds, because carried interest is currently treated as a capital gain and taxed at a substantially lower rate than normal labor income.  New York taxes all income at the same rate; however, nonresidents who work in New York are taxed only on labor income they earn in the state, and not on capital gains.  Non-resident hedge fund partners don’t get off scot free, though: they still are taxed by their state of residence.

Our Manhattan Institute colleague Josh Barro observes:

Maybe I’m misinterpreting, but (the New York bill language) is essentially saying that carried interest payments are labor income, not investment income … So, a hedge fund manager who lives in CT and works in NY would pay NY tax on that income, just as an investment bank managing director who lives in CT and works in NY pays NY tax on his income.

I’m not sure this would even have significant economic effects, since most of these non-resident taxpayers likely reside in NJ and CT, where they are currently paying tax on this income. Our top rate is the same as NJ’s, so for NJ residents this is just a money grab from NJ coffers with no net impact on the taxpayer.  CT residents (subject to 6.5% state income tax) would pay about 2.47% more at the margin– though if (last year’s) NYS income tax increase actually sunsets, that gap would shrink to 0.35%.  And NY would also get a significant revenue grab from CT.

Hmm.  Who’s going to break this news to Governors Christie and Rell?

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

You may also like

Albany Lawmakers Push a $4 Billion Tax on Health Insurance

Legislative leaders are proposing an additional $4 billion tax on health insurance plans in the upcoming state budget – but withholding specifics of how it would work. Read More

As migrants flow to NY, so does red ink 

The influx of foreign migrants to New York could cost the state $4.5 billion more than expected next year, Governor Hochul today warned.  Read More

The Bill Arrives: NY Faces $9B Budget Gap Next Year 

New York’s outyear budget gaps, the shortfall between planned state expenses and state tax receipts over the next three years, has exploded to more than $36 billion, just-released documents show.  Read More

NY school spending again led US, hitting all-time high in 2020-21

Public elementary and secondary school spending in New York rose to $26,571 per pupil in 2020-21, according to the latest Census Bureau data Read More

A Tale of Two Levies

New York school districts are getting record levels of state aid. But how many are using it to cut taxes? Read More

Albany’s Belated Budget Binge 

State lawmakers have begun passing the bills necessary to implement the state budget for the fiscal year that began April 1. Read More

Courts set a limit on NY’s tax reach

Just in time for tax season, New York State's tax agency just lost a major legal challenge to its policy of pursuing maximum income tax payments from wealthy vacation homeowners—even when they live elsewhere. Read More

DiNapoli aims to curb NY’s borrowing binge

Comptroller Thomas DiNapoli has unveiled a new proposal for constitutionally curbing the state’s seemingly uncontrollable appetite for borrowing. Read More