Campaign Donations Could Keep ‘Carried Interest’ Tax Loophole Open

New York legislators announced Monday they’re introducing a bill to end a perk that lets financial executives pay a significantly lower tax rate than most Americans. Eliminating the so-called “carried interest” loophole could generate $3.7 billion a year in revenue for the state of New York — but if the financial industry has its say, the movement there and similar measures in other states will face as tough a battle as it has in the nation’s capital.

Under the current tax system, executives at hedge funds and private equity firms avoid paying potentially billions of dollars in taxes each year because their income is treated as being derived from investments rather than a weekly paycheck. Wealthy Americans can pay an income tax rate as high as 39.6 percent, but there’s only a 20 percent tax on income from capital gains on investments.

There’s growing bipartisan support for ending the carried interest loophole at the federal level — Democrats Hillary Clinton and Bernie Sanders have called for its elimination, as has Republican front-runner Donald Trump. But there’s no consensus in Congress, where legislation to end the tax break has languished since last summer. The securities and investment industry has already poured $37 million into congressional elections this cycle, and industry groups have lobbied to protect the benefit.

According to a report from the Hedge Clippers, a group backed by labor unions and community organizations, measures like the one in New York will soon be introduced in California, Massachusetts, Connecticut, Illinois, Pennsylvania and New Jersey. The group estimates that eliminating the carried interest loophole from state tax laws there could generate up to $7.4 billion a year in revenue. The effort is no sure thing, though; as on the national level, money from the financial industry has flooded into states' elections.

The securities and investment industry has given $47 million to politicians in those seven states since 2014, according to data from the National Institute on Money in State Politics. Executives at hedge funds and private equity firms have also been generous donors to the Republican Governors Association. That group was headed by Gov. Chris Christie — whose signature would likely be needed to repeal the tax loophole in New Jersey.

Similarly, in New York, a bill to repeal the state’s carried interest loophole would need the support of Gov. Andrew Cuomo, a Democrat. However, he has been a top recipient of campaign contributions from hedge fund executives who make big money off the loophole. A study from the Hedge Clippers last year found that Cuomo had received $4.8 million in donations linked to hedge funds as the state’s attorney general and governor.

Some of the states’ governors may have direct financial stakes in keeping the tax benefit alive as well. Illinois Gov. Bruce Rauner and Massachusetts Gov. Charlie Baker, who were elected in 2014, have both had private equity interests in the past.

Rauner is the former chairman of GTCR, a Chicago-based firm that makes big fees from managing investments for state pension systems. He appears to still have an ownership stake in the firm, according to its registration form with the Securities and Exchange Commission.

During his 2014 gubernatorial bid, Rauner told the Chicago Tribune some of his income was “capital gains through carried interest.” NBC Chicago reported that Rauner had paid a 19 percent income tax rate between 2010 and 2012. His 2013 financial disclosure forms documented his holdings in myriad investments that could also help him benefit from the carried interest loophole.