New York Gov. 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.
Mr. Paterson said Thursday he no longer supports the levy because investment companies could avoid it just by moving to neighboring states. Connecticut Gov. M. Jodi Rell on Wednesday sent a letter to the New York Hedge Fund Roundtable urging its members to relocate to her state to escape the proposed tax.
The Democrat-controlled Legislature has yet to vote on the bill that includes the tax, part of a proposed $136.5 billion budget for the fiscal year that began on 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 proposed levy, “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 separately has considered increasing the federal levy on the earnings by treating them like ordinary income. Carried interest is currently taxed at the usually lower capital gain rate.
Morgan Hook, a spokesman for Mr. Paterson, didn’t immediately return calls seeking comment.