State legislators look to close ‘carried interest tax loophole’

REP. AARON REGUNBERG, left, D-Providence, stands with supporters announcing a bill to tax carried interest income like earned income. / COURTESY AARON REGUNBERG
REP. AARON REGUNBERG, left, D-Providence, stands with supporters announcing a bill to tax carried interest income like earned income. / COURTESY AARON REGUNBERG

PROVIDENCE – State legislators have introduced legislation to tax carried interest income the same as earned income so money managers will “pay their fair share.”

The legislation, introduced both in the House and Senate, would establish a 19 percent “fairness fee,” or tax, on such investment management services as hedge funds and private equity. The additional tax would effectively level the carried interest tax – currently taxed as capital gains at 20 percent – with the earned income tax of 39.6 percent.

Rep. Aaron Regunberg, D-Providence, a co-sponsor of the legislation, says this is an issue of fairness.

“Labeling those fees as capital gains is a tremendous stretch,” he said in a statement. “The reason the capital gains tax is so low is because of the risk involved in investing your own money. But these managers earn their fees from investing other people’s money rather than their own. As a result, we have a loophole where billionaires get a lower tax rate than kindergarten teachers and truck drivers.”

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How to tax carried interest is debated throughout the country, and the Rhode Island legislation would only go into effect if similar legislation passes in New York, Connecticut, Massachusetts and New Jersey.

“Since Congress has been slow to address this problem, it’s now up to the state legislatures,” said Sen. Adam J. Satchell, D-West Warwick.

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