Rep. Regunberg, Sen. Satchell introduce legislation to establish a 19 percent fairness fee on carried interest
STATE HOUSE — As debate rages across the country about how to tax carried interest — the fee hedge fund and private equity billionaires charge for investing other people’s money — Rep. Aaron Regunberg (D-Dist. 4, Providence) and Sen. Adam J. Satchell (D-Dist. 9, West Warwick) have introduced legislation to close the unfair loophole in tax law.
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. Representative Regunberg and Senator Satchell have introduced legislation that seeks to close the loophole by evening out the taxation playing field.
The bill (2017-H 5563/2017-S 0259) 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.
“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.”
Closing the 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’s needs.
The legislation would take effect only if the state legislatures in Connecticut, Massachusetts and New Jersey enact similar legislation.
For more information, contact:
Daniel Trafford, Publicist
State House Room 20
Providence, RI 02903