Tax on hedge fund managers from out of state rejected

ALBANY - Seeking to prevent an exodus of hedge fund managers from New York, lawmakers have tentatively rejected a proposed income tax on investors who work in the state but live elsewhere, sources told Newsday.

They said the State Senate and Assembly could act as early as Tuesday to remove the tax from a $900-million revenue bill. That legislation passed the Assembly July 1 but has been held hostage by the Senate because of other issues, delaying the budget's adoption.

The proposed tax on hedge fund managers from New Jersey and other states who commute to New York would raise $50 million toward closing a $9.2-billion deficit. But the levy is being used by Connecticut to lure hedge fund companies.

Paterson, who introduced the tax, has since publicly backed away from it. His spokesman declined to comment Friday.

Senators, regardless of party affiliation, oppose the levy. "The hedge fund tax would adversely affect businesses New York needs. That's why we would like to see it removed," said an aide to Senate Democratic chief John Sampson of Brooklyn, who requested anonymity. His spokesman declined to comment.

"Senate Republicans do not support any increases in taxes and fees at all," said their spokesman Mark Hansen.

Asked about the so-called "hedge fund tax," Sisa Moyo, an aide to Assembly Speaker Sheldon Silver (D-Manhattan), said, "Conversations continue."

The levy would apply to "carried interest" or the share of a fund's profit given to its managers. The carried interest of residents is already subject to New York's income tax and the federal capital gains tax. About 1,000 out-of-state managers would be affected.

In a letter to the trade group, New York Hedge Fund Roundtable, Connecticut Gov. M. Jodi Rell said, "As lawmakers in Albany consider a proposal to vastly increase the tax liability of hedge fund professionals who work in New York . . . I would like to convey a very simple . . . message: Connecticut welcomes you!"

Separately Friday, Paterson's budget office approved axing 277 jobs at state agencies through an early retirement program; the administration hopes 3,000 to 6,000 workers will eventually retire from a payroll of 194,700. In the first round, the biggest cuts came from the General Services office, 124 jobs, and Homeland Security and Technology, 25 jobs each.

Paterson has said layoffs will be needed to achieve the $250 million in savings called for in this year's budget.

Highlights of the bill

The state Senate hopes to complete the $134.4-billion budget next week by passing a $900-million revenue bill passed by the Assembly on July 1. Both houses are expected to remove $50 million in taxes on hedge fund managers who work in New York but live in other states. The bill would:

- Suspend sales-tax exemption on clothing and shoe purchases below $110, starting Oct. 1; it would be restored April 1, 2012 ($330 million in revenue to the state this year).

- Reject Paterson's proposal allowing wine sales in grocery stores and a tax on sugary beverages to fund obesity prevention programs. ($0)

- Eliminate STAR exemption for homeowners earning more than $500,000, beginning in 2011-12 ($0 million).

- Limit personal income tax reduction for NYC residents to the first $500,000 of income ($120 million).

- Cap and defer business tax credits ($100 million).

- Limit tax deduction on charitable contributions for multimillionaires ($100 million).

- Expand operating hours of slot machines at horse racing tracks ($45 million)

- Allow state and local governments to borrow from state pension plan to make required contributions to it; money must be repaid over 10 years with a 5 percent interest rate. Governments would be required to establish reserve funds to address fluctuations in contribution amounts. (About $200 million).

SOURCE: NYS Legislature's Democratic majorities