After a month of political jockeying, it appears hedge fund and private equity managers working in New York, but living outside of the state, will not have to pay more taxes on their carried interest.

Embattled New York Gov. David Paterson, who will not be seeking election later this year, has backed off his earlier eagerness to tax hedge fund and private equity fund profits as regular income rather than the current capital gains tax, The Wall Street Journal reported.

Morgan Hook, the spokesman for Parterson, confirmed the report to HedgeFund.net.

“The Governor re-submitted a revenue bill that does not contain the hedge fund tax, and he would prefer the legislature pass his version of the revenue bill,” Hook said via e-mail.

In late June, Paterson seemed to have the approval of state lawmakers, however, the proposal quickly roused the furor of hedge fund managers as well as New York City Mayor Michael Bloomberg. (A New York Post article called the proposal “lame-brained.”)

“It shows that in a highly competitive market, modestly changing economic terms can have significant consequences,” John Brunjes, a director of the Connecticut Hedge Fund Association, told HedgeFund.net.

Bloomberg and others said managers would simply leave New York and move to more tax-friendly locales, such as Connecticut. Connecticut Gov. Jodi Rell offered to help managers find suitable office space during their relocation process.

Rell sent a June 30 letter to Timothy Selby, president of industry trade group New York Hedge Fund Roundtable, in response to Paterson’s initial proposal saying her state, which is already home to a number of hedge funds, would gladly welcome more managers.

“It is gratifying to see the Governor (Rell) recognize the value of hedge funds,” said Brunjes, who is also a partner at law firm Bracewell & Giuliani.

The proposal to change the tax was made in an effort to close the $9.2 billion budget deficit for New York. The state estimated an additional $50 million in tax revenues would come into the state’s depleted coffers.

Earlier this month, Selby invited Rell to speak at one of the group’s monthly events. That invitation was answered by Rell a few days ago with an invitation of her own, letting Selby know he and his colleagues should join her at a Connecticut steakhouse on Aug. 2 to discuss next steps.

Selby did not reply to an inquiry about whether or not he would attend the dinner. A spokesman from Rell’s office also did not say whether or not the dinner was still on for next week.

Go to The Wall Street Journal article (subscription required)
Go to the New York Post article

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