New York's Paterson Retreats From Taxing Out-of-State Hedge-Fund Managers

New York Governor David Paterson is retreating from a plan to tax hedge-fund managers who commute into the state, which was projected to raise $50 million a year to help balance an overdue budget.

Paterson, a Democrat, said today he no longer supports the levy because investment companies could avoid it just by moving to neighboring states. Connecticut Governor Jodi Rell yesterday sent a letter to the New York Hedge Fund Roundtable urging its members to relocate to her state to escape the proposed tax.

“That is one that is worth revisiting,” Paterson said in an interview on radio station WOR in Manhattan. “This is not in my original budget. We were not favorable to this. We did it because we couldn’t get the Legislature to do the other revenue raisers that we thought were far more constructive.”

The Democrat-controlled Senate adjourned today without voting on the bill that includes the tax, part of a proposed $136.5 billion budget for the fiscal year that began April 1. The nation’s third-most populous state has been shuffling funds between accounts and delaying payments for the past three months while running on emergency spending bills in the absence of a budget.

Under the proposal, “carried interest” paid to hedge-fund managers who work in New York and reside elsewhere would be subjected to New York income taxes. Carried interest is the percentage of profits received by investment managers at partnerships.

Congress Considered

Dan Weiller, a spokesman for Assembly Speaker Sheldon Silver, said today in a telephone interview that the proposal was originally made by the governor last year. He said it re- emerged in a recent three-way budget agreement between Paterson, Silver and Senate President Malcolm Smith.

“What this measure does is to place the same tax burden on out-of-state residents that’s already on state residents,” said Weiller. “This has been a very tough budget requiring many tough choices.”

The state’s top income-tax rate is 8.97 percent. Connecticut’s highest rate is 6.5 percent. Congress separately has considered increasing the federal levy on carried interest by treating it like ordinary income. The earnings are currently taxed at the usually lower capital-gain rate.

Relocation Specialists

In her letter yesterday, Rell, a Republican, said Connecticut economic-development officials and relocation specialists stand ready to help hedge-fund managers and their families who want to move to her state from New York.

“As lawmakers in Albany consider a proposal to vastly increase the tax liability of hedge-fund professionals who work in New York -- many of whom have already wisely decided to live in Connecticut -- I would like to convey a simple, yet heartfelt, message: Connecticut welcomes you,” she said in the letter addressed to Timothy Selby, president of the Hedge Fund Roundtable. On its website, the group says it has more than 1,200 members who help each other develop knowledge and methods.

Selby said in a telephone interview today that the state “should spend more of its efforts focusing on what it can do to attract and maintain existing businesses.”

Speaking on WOR, Paterson said that “based on conversations” he had yesterday with other elected officials, including Rell, “it might be far more responsible for us to revisit that issue.”

“What Governor Rell said is right and she’s trying to take advantage of it,” Paterson said. “Just make Connecticut the main office and they don’t have to pay the taxes.”

Morgan Hook, a spokesman for the governor, didn’t immediately return calls seeking comment.

To contact the reporter on this story: Michael McDonald in Boston at mmcdonald10@bloomberg.net.

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