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States Take on the Hedge Fund Chiefs

A Connecticut state legislator explains why she's fighting for fair taxation of hedge fund managers.

Research & Commentary
February 02, 2017

by Robyn Porter

This past week, at a news conference in Hartford, Connecticut state representative Robyn Porter presented new legislation designed to close the “carried interest” loophole, the tax provision that essentially cuts the tax bills of billionaire hedge fund managers by nearly half. Similar bills are moving forward in New York, Massachusetts, New Jersey, and Rhode Island as part of a regionally coordinated effort. Here’s how Porter describes her initiative.

It is going to be an uphill battle to balance Connecticut’s state budget this year, as we face a growing deficit of $1.5 billion dollars plus. What we should also know is that we cannot rely on cuts alone this go round. We must create revenue streams for the state that will foster a budget based on tax fairness. That is why I am pleased and proud to support HB6973 – legislation that will close the “carried interest” loophole that allows hedge fund managers to avoid paying the appropriate tax rate on their labor.

Currently, fund managers are allowed to take an initial 2 percent cut from their clients, which is taxed as labor. Then, they receive an additional 20 percent we reference as “carried interest” that is not taxed as labor but as capital gains. This is called the 2 and 20 structure, which leaves a 19.6 percent loss in tax revenue to state and federal governments.[pullquote]The carried interest loophole lets hedge fund managers avoid paying the appropriate tax on their labor.[/pullquote]

This is where the irony of it all comes in. I mean, I cannot understand for the life of me how a tax break such as this continues to exist when it makes no logical sense for those who have no “capital” at risk to receive this kind of benign tax remedy while we are cutting critical services to poor and working class families — not to mention the laying off of middle-class workers. This is a loss to our tax rolls at a time when that revenue is so desperately needed.

Not for nothing, the fact that finance is fueling the 1% is not shocking to me but what is shocking to me is how no one is talking about what finance is doing or should I say not doing for the 99% — and that is providing sound middle-class jobs. See, there was a time when financiers made their money by investing in research and development, employee training and business expansion. Now, they make their fortunes by way of timing and manipulating the market while pulling funds out of gainful corporations and paying it forward to investors.

Yes, investors are getting rich but working class people are not reaping in the rewards. Instead, they are being led to the unemployment line where many are re-entering the workforce as low-wage earners requiring state aid, which only further bleeds our economy.

Now, the last thing I will touch on is the argument from opponents of this bill who say hedge fund managers will flee Connecticut for states like Florida. Well, Saskia Sassen, a professor of sociology at the University of Chicago, counters that argument with what she calls “sticky capital,” where she basically argues that the globalized economy for high-end services such as finance, PR, legal, etc. encourages employers to cluster in areas where barriers to business are low.[pullquote]Investors are getting rich, but working class people are not sharing in the rewards.[/pullquote]

In places like New York City and Greenwich, Connecticut, finance employers not only have access to a high concentration of employable talent and potential clients, they are also surrounded by the ancillary businesses they depend on for efficient operation like prime brokers, auditors, lawyers, accountants, etc.

Therefore, employers who would leave this “cluster economy” would be essentially cutting their noses off to spite their face, so as to speak. Not for nothing, GE did not move to Florida or Texas or Alabama – they moved to Boston, where costs and taxes are relatively high. Why? Because it gives them access to arguably the greatest concentration of human capital and intellectual prowess needed to make their business highly profitable. And yes, what I am saying is actually supported in a statement made by GE chief executive Jeff Immelt, when he stated why Boston was selected. So, despite the rhetoric, I believe if Connecticut’s aim is to grow an economy that works for all and not just the wealthy, proposed HB6973 needs to be an indispensable part of this year’s budget policy.

State Representative Robyn Porter was elected to Connecticut’s 94th District in 2014.

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