"Don't tax you. Don't tax me. Tax that fellow behind the tree."
Those decades-old words, credited to the late Russell Long, a U.S. Senator from Louisiana, continue to echo when taxes are on the table—especially when legislators facing a projected $3.6 billion deficit want to convince the public someone else will pay to fix it.
Apparently, hedge fund managers are this year's version of the "man behind the tree."
HB 7313, which was heard this week in the legislature's Finance, Revenue, and Bonding Committee, raises millions of dollars by closing the so-called carried interest loophole on certain parts of the financial sector.
Proponents say the 19% tax on the state’s hedge fund industry could raise as much as $530 million. And some supporters are working hard to paint the picture that only wealthy hedge fund managers will foot the bill.
But as members of the committee learned at an April 11 hearing, many Connecticut residents who are not hedge fund billionaires or even millionaires will be hurt if this bill becomes law.
“Taxes on financial services directly increase the cost of financial advice and education for Main Street investors who need it most,” David Bellaire of the Financial Services Institute and CBIA Counsel Louise DiCocco said in joint testimony.
“Many of these investors are hardworking Connecticut citizens who have relatively small amounts to invest, do not have access to sophisticated financial advice, and would benefit the most from a relationship with a quality financial advisor.
“Placing a new and significant cost on this critical service will only further exacerbate the retirement savings crisis currently plaguing our country.”
Hurts Retirees, Middle Class
Bellaire and DiCocco said the tax will hurt retirees and the state's middle class.
“With approximately 77 million baby boomers racing toward retirement in America and the increasingly complex financial products in the marketplace, state legislators should be taking steps to encourage workers to obtain quality financial advice and plan for their retirement rather than penalize them for doing so,” they said.
Bruce McGuire, president of the Connecticut Hedge Fund Association, said the bill could hurt many people.
“The hedge fund industry is not just a handful of billionaires," he said. "There are many middle-income people working for these firms.
More taxes only contribute to the state’s financial woes. That’s why we're in this mess—too many surcharges and taxes.
The surcharge on the state’s hedge fund industry would only take effect if New York, Massachusetts, and New Jersey each adopted similar laws.
Connecticut’s hedge fund industry, largely based in Fairfield County, has over 400 funds managing $750 billion, making our state the third-largest center of hedge funds in the world.
“This position did not come about through government programs but through the combination of organic factors, including the state’s income tax policy,” McGuire testified.
Many of Connecticut’s hedge funds came here from New York, he said.
“They chose Connecticut, in part, because of the favorable relative tax climate.”
And they could just as easily leave if the climate changes.
“If this surcharge on all investment management fees is approved, we believe that a certain percentage of firms—and their founders—will leave Connecticut for other states,” he added.
Florida is actively recruiting hedge funds, McGuire said.
“This industry is more fragile than you think,” he told lawmakers.
“We would encourage our state legislature to spend more time on programs designed to encourage fund formation in Connecticut.”
Supporters of the bill included Rep. Russ Morin (D-Wethersfield), who said it was “an equity thing for those of us who are working stiffs,” and an AFL-CIO representative who accused lawmakers of too often targeting state and municipal workers and the middle class.
CBIA President and CEO Joe Brennan has called the tax a bad idea that will cost jobs. He said more taxes will only contribute to the state’s financial woes.
“That’s why we’re in this mess—too many surcharges and taxes,” he said.
Gov. Dannel Malloy also sided with Republicans opposing the bill.