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New York governor proposes bill to tax carried interest as ordinary income

Bill will need cooperation from four other states to go into effect

New York Gov. Andrew Cuomo

New York Gov. Andrew Cuomo on Thursday announced he had submitted a bill to the state Legislature seeking to tax carried interest as ordinary income rather than capital gains.

He asserted in a news release that the "egregious loophole" in federal tax law allows wealthy individuals' and corporations' use of carried interest to pay lower taxes "at the expense of the middle class."

However, any law passed by New York would be inoperative unless Connecticut, New Jersey, Massachusetts and Pennsylvania "enact legislation having substantially the same effect as this bill," said Mr. Cuomo's news release.

The federal carried-interest tax provision costs New York approximately $100 million a year, according to the release. Some income earned by hedge fund managers, private equity investors, venture capitalists and certain real estate investors benefit from carried interest rates.

The new federal tax law requires that investments be held for at least three years, up from one year, to be eligible for the lower capital gains rate.

Mr. Cuomo's bill would treat this compensation as ordinary income for state tax purposes, the news release said.