Hedge Fund taxation – why state tax hikes are a bad idea if prosperity is your goal


Many people are surprised to find out that Connecticut is the third largest center of hedge funds in the world with over 400 funds managing $750 billion. New York City is number one, and London is number two. (Side note: If you only count the biggest firms that manage a billion dollars or more, Connecticut is actually in second place, knocking London to third place).


Low taxes = Hedge Fund growth in Connecticut

One of the reasons Connecticut grew into a Hedge Fund center is its proximity to New York State. At one time, Connecticut had much more favorable tax rates. And by that, I mean no income tax at all. That changed in 1991 with the adoption of a "temporary" income tax that would be removed once the deficit was eliminated (hence its uninterrupted existence). 


High Taxes would kill the Connecticut Hedge Fund Industry

Some people have proposed a surtax on Hedge Funds to close the non-existent so-called Carried Interest Loophole. Previously, we discussed why no loop hole actually exists, more info here.


We think that those that have proposed this do not fully appreciate the circumstances that led to Connecticut being a Hedge Fund center. 



As of this writing, it appears the bill will not be included in the state budget this year, but Governor Malloy may veto the proposed budget. If it doesn't pass, we may have to worry about this again in the future. The bill includes the following:


  • Proposal to tax hedge funds and other managed investments at 19%
  • The bill would impose a surcharge on income derived from investment management services (and would cover investors from all income levels)


The bill is aimed at Hedge Fund and Private Equity managers to "close the carried interest loophole". In reality, there is no "loophole". Again, there are legitmate, long term capital gains.


The language that they used for the bill was very broad: "Any income derived from investment management". Many people don't realize that this includes lawyers that have a fund management practice, accounting firms that have practice groups that provide services to this industry, and any income derived from investment management. In reality, this bill will affect any registered investment advisor, not just Hedge Funds. 


Those that support this bill say it's a great idea, because think of all the additional revenue the state will get in additional taxes! Unfortunately, it's not that easy. 


I hear Florida is lovely this time of the year…

If faced with any additional 19% tax, many Hedge Fund investors would simply leave the state, stripping us of the current taxes and other economic benefits they currently provide; and many already have.


Florida had no income tax, and no estate tax. And? Florida is working to actively recruit business to move from Connecticut to Florida. They understand the economic benefit of Hedge Funds for their state. They send reps from their Business Associations to conferences to woo them… but we rarely see Connecticut Economic Development booth – well, anywhere. 


Recently, a Hedge Fund billionaire named David Tepper moved from New Jersey to Florida. He had resided in New Jersey for 20 years. When he left, he brought his Headquarters down South with him. He left simply because the tax treatment is so much better for him in Florida. He was New Jersey's wealthiest resident. It is estimated that his move will cost New Jersey hundreds of millions of dollars in lost revenue. 


This is not just about "The Rich"

If this bill passes, it would affect the pension for state workers. If there's no money coming in, there's no pension. 


Bruce also talks about "The multiplier affect". There are many service industries that have flourished because of the Hedge Fund growth in our state. Accounting firms, law firms, fund administrative firms, capital introduction firms, are just the beginning. Think of how many jobs have been created overall because of the population of Hedge Fund investors and their families. 


Many businesses in Greenwich and Stamford have told Bruce that they have intentions of actually growing their businesses just to serve the Hedge Fund industry. 


China and Japan – The new forefront of Hedge Fund investing

China and Japan are envious of what Connecticut, specifically Greenwich, has done. They are looking to replicate it in their county to grow their financial systems and asset management industry. They are astounded that a small town of 60,000 people has been able to achieve this level of success (with no support from the state). 


A small in China that is trying to become a "Fund Town" actually has gates that lead into the town that read "Welcome to the Greenwich of China." So other countries are looking to us as a role model, but we're trying to kick Hedge Funds out?


Why don't the wealthy just pay "their fair share"?

Bruce and Anthony discuss this in the video. It boils down to a couple of different issues:

  • What is a "fair share"?
  • Who decides what the "fair share" is?
  • What is "wealthy"?


I think the last question is the most important. Are there very wealthy Hedge Fund managers? Yes. Are there also just regular people, working to provide for their families, that would also be affected negatively by this law? Yes. They are simply working with clients, negotiating fees that everyone is happy with, and then successfully providing their client with the service they agreed to. 


And we have yet to see many people holding protests at NFL games or U2 concerts complaining that they are "too wealthy". 


Connecticut should be helping hedge fund businesses grow, instead of trying to come up with creative ways to tax them more.


Need help with a tax plan for your hedge fund? Contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.