The Honorable Andrew Cuomo Governor of the State of New York State Capitol Albany, NY 12224 January 15, 2018 Dear Governor Cuomo, We are the Patriotic Millionaires, a group of wealthy individuals deeply concerned about our country’s destabilizing concentration of wealth and power. New York is an innovative state. As you continue to lead and inspire the nation, we urge you to close the carried interest tax loophole as part of this year’s state budget. Closing that loophole - a fundamental mischaracterization of income that allows for fund managers to pay a tax rate that is half what every other working American pays - would capture an estimated $3.5 billion (please see attached) in tax receipts for the great state of New York. We strongly encourage you to include language to close the loophole in the budget bills you will be submitting to the Legislature tomorrow, and we stand ready to work with you to pass these bills into law.
By doing so, other states in the Northeast with similar measures - New Jersey, Massachusetts, Connecticut, and Rhode Island - will be pressed to pass their own carried interest loophole-closing legislation more quickly. Since New York is the national center of private equity and hedge fund activity, your leadership on this critical issue is vital. Quick passage of this bill means additional revenue for your priorities for New York: education, housing, job creation, healthcare improvement, and infrastructure that could potentially start flowing as soon as next year. There is widespread support for closing the carried interest tax loophole - indeed every major 2016 presidential candidate made it part of their campaign. But since Congress just passed a major tax bill that fails to close this loophole, it is critical that the states take this matter up. In every state there are many budgetary needs, and with the state bill, New Yorkers could immediately start seeing additional revenues that you and your colleagues could put into the public services that need it most in your state.
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The carried interest loophole is the poster child for money overcoming logic and decency in our public policy process. This loophole benefits a few thousand of the richest Americans while offering absolutely no economic benefit to anyone else. By closing it in New York, you can lead the nation in restoring a sense of fairness to our tax code. Over a billion of dollars in campaign contributions and lobbying over the past decade have succeeded in blocking action on carried interest in Washington, giving New York State a unique opportunity to demonstrate to the American people that government is capable of working for the people, not just for a wealthy few. At a time when our national political political system is fraught with with uncertainty, we respectively respectively urge you to lead the way on this critical issue. Yours in service, Morris Pearl Chair
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Assets Under
Expected
Expected
Incenti
Expected aggregate fund
Management
return
annual return
ve fee
manager annual earning
H
$3,088,400,3
F
45,317.00
P
$1,115,392,2
E
82,823.00
2.93%
13.26%
$90,490,130,1 17
15%
$13,573,519,517
$147,901,016, 702
15%
$22,185,152,505
Halved
Tax
Expected carried
rate
interest loss
$6,786,759
19.6
,758
0%
$11,092,57
19.6
6,252
0%
$1,330,204,912
$2,174,144,945
TOT AL:
$3,504,349,858
Methodology: The “master list” of all fund registered investment advisors advisors were obtained from the SEC. Data for Schedule D of Question 7(b)(1) of the investment advisor public disclosure for the previous five filing quarters was matched, using the reference ID field, with firm data provided Question 1. Matched data was then de-duplicated by file date and reference ID, yielding 37,602 unique funds. funds. Of these, 14,060 were managed by registrants who listed their principal office within New New York State. Exempt reporting advisors were totaled similarly, and comprised 504 hedge funds and 430 private e quity funds. Combined, these New York hedge funds reported gross assets under management of $3.08T, while New York private equity funds had $1.15T. To estimate total earnings, we used private equity and hedge fund return benchmarks for a five year period. One uses the five year average of leading hedge fund and private equity benchmarks, benchmarks, assuming that the large state sample sizes roughly track the mean. For hedge funds, we used the HFRI Fund Weighted Composite’s 36 month average.1 For private equity, we used the Cambridge Associates U.S. Private Equity Index 5 year end-to-end end-to-end pooled return published Q4 2015.2 By multiplying the return benchmarks by the AUM, we came up with a rough estimation of expected annual earnings. Next, the carried interest apportioned to hedge fund and private equity managers is estimated. Carried interest applies only to the incentive fee earned by hedge fund and private private equity managers. We used 15% of the total of hedge fund and private equity expected annual earnings to arrive at the expected
1
https://www.hedgefundresearch.com/family-indices/hfrx#
2
http://40926u2govf9kuqen1ndit018su.wpengine.netdna-cdn.com/wp-content/uploads/2016/05/Public-2015-Q4US-Private-Equity.pdf
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aggregated fund manager annual earnings. We went with 15% because we believe this number to be extremely conservative. With hedge funds, 20% is the industry standard and 17.14% was the industry average for new funds funds launched in 2013, as tracked by Preqin.3 In private equity, the 20% standard is prevalent in 85% of commingled funds, according to a 2015 report by Preqin.4 Separate accounts, where approximately one-third of investor capital was committed committed in late 20145, are less likely to charge a 20% carry, althoug although h 90% charge 10% or more more6 . To calculate the amount lost to carried interest exemptions, we halved the expected aggregate aggre gate fund manager annual earnings. This was done to reflect the individual reporting of taxes paid paid on partnerships interest in financial financial service partnerships. partnerships. As Professor Victor Fleisher discovered in in his work on the subject, the IRS Statistics of Income shows that roughly half of financial industry partnership income is paid at the favorable favorable carried carried interest interest rate.7 8 After halving this sum, we multiplied the remaining amount by 19.6%, the difference between the top bracket for short-term capital gains (equivalent to ordinary income, at 39.6%) and the top bracket for long-term capital gains (20%).
3
https://www.preqin.com/blog/0/8340/hedge-funds-fees
4
https://www.preqin.com/docs/press/Fund-Terms-Sep-15.pdf
5
http://www.pionline.com/article/20141222/PRINT/312229973/assets-invested-in-separate-accounts-starting-to-a dd-up 6
http://www.valuewalk.com/2015/09/48-of-private-equity-separate-accounts-charge-a-20-performance-fee/
7
56% of the income generated by finance and insurance partnerships in 2012 was taxed at this rate
8
www.nytimes.com/2015/06/06/business/dealbook/how-a-carried-interest-tax-could-raise-180-billion.html
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