Move to eliminate “carried interest” loophole gains traction in L.A. County

LOS ANGELES – The Los Angeles County Board of Supervisors voted 4-1 Tuesday to back a bill in the Assembly to levy an additional 17 percent tax on the profits of hedge fund and private equity managers in an effort to close what some see as an unfair federal tax loophole.

The federal government taxes fund managers’ share of profits — known as “carried interest” — as long-term capital gains, which are taxed at a lower federal rate than ordinary income.

While on the campaign trail, Donald Trump repeatedly said he would eliminate the special treatment for carried interest, calling it unfair to American workers. The federal tax bill passed in December did not do so, though advisers said White House efforts to make the change were stymied by lobbyists.

Assembly Bill 2731, introduced by Assemblyman Mike Gipson, D-Carson, follows the lead of New York, New Jersey, Illinois and at least a half dozen other states in trying to capture that lost tax revenue at the state level.

Supervisor Janice Hahn recommended that the Board of Supervisors support the bill, which would direct the tax dollars to public schools, early childhood education, career technical training and school counseling.

“California has the fifth-largest economy in the world and is home to the most billionaires in the country,” said Supervisor Janice Hahn.

“And yet, we fall far behind almost every state in education spending. By finally closing this loophole, we can make sure some of the wealthiest Californians pay their fair share and that our schools get the funding they need to succeed.”

At least one former money manager supports the plan.

“It is ridiculous that some of the highest earning people in our community have lower tax rates than other people who work for a living,” said Morris Pearl, chair of the Patriotic Millionaires organization and former managing director of asset management firm BlackRock.

Those in favor of the current tax treatment argue that it rewards entrepreneurs for the risk they take investing in uncertain outcomes.

Opponents of Gipson’s bill in particular say it is overly broad and would discourage investment management firms from locating in California.

“Those that remain in the state would likely have a harder time attracting and retaining employees. This runs counter to the state’s interest in promoting economic development and job growth,” the Securities Industry and Financial Markets Association stated in a letter to Gipson.

New York’s proposed legislation would take effect only if neighboring states enact similar laws, in order to prevent an exodus of wealthy taxpayers, according to the Wall Street Journal.

The California proposal does not include such a restriction.

It is not clear exactly how much new tax revenue would be generated in California. Many of the state’s billionaires have made their money in tech, while money managers tend to gravitate toward Wall Street.

Though hedge funds account for only a portion of the profits at issue, a 2016 industry analysis by data research firm Preqin found that New York- based hedge fund managers control roughly 50 percent of total assets under management in the sector, while those in California manage 5 percent.

Supervisor Kathryn Barger voted against supporting the bill.

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