Economic Impact Analysis: Proposed New York State Tax Increases on Carried Interest of the

Private Funds Industry

Charles Swenson1 PhD CPA

New York’s private funds industry drives economic growth in the Empire State. Private equity,
venture capital and hedge funds invest billions in thousands of the state’s companies. Private fund
investments also provide significant assistance to the state’s retirement system, the New York State
Common Retirement Fund. All told, the industry contributes almost $4.5 billion annually to state and
local tax revenues. This important industry also directly employs 134,000 New Yorkers. An additional
236,000 New Yorkers are employed via the industry’s “ripple through” effect on the rest of the state’s
economy. The average annual wage in this industry is more than $200,000, i.e., these are “good paying”
New York jobs.

Private funds firms have played a major role in the development of New York companies which
employ several hundred thousand people including iQor (New York City), Infor Global Solutions (New
York City), The Nature’s Bounty (Bohemia), USI Insurance Services (Valhalla), Albany Molecular
Research (Albany), CSC ServiceWorks (Plainview), International Imaging Materials (Amherst), Latham
Pool Products (Latham), McGraw-Hill Education (New York City), Ioxus (Oneonta), and Peloton (New
York City).
A bill in the current Legislative Session, S303, and the Governor’s Executive Budget, would
impose a special 19% and 17%, respectively, add-on income tax on the industry. This tax, combined with
current New York state taxes, New York City income taxes, and federal taxes, would result in an overall
tax rate as high as 72.496% on the industry – one of the highest tax rates in the world. This study finds
that the tax is so impactful that the industry will likely move out of state, reducing the State’s workforce
by 370,000 jobs (or 4% of the State’s workforce), resulting in an annual loss of $4.5 billion annually in
State and local revenues which fund other programs. Even in a more modest exit scenario, the State’s
workforce would be reduced by approximately 121,000, and State and local tax revenues are expected to
drop by approximately $1.08 billion per year in the long run because of the tax increase.2

The increased taxes in this legislation have a disincentive effect on labor supply as well as
business formation and growth. Although the private funds industry is composed of businesses, such

1
Professor and Leventhal Research Fellow at the Marshall School of Business at the University of Southern
California. Dr. Swenson has been on the USC faculty since 1987, and has previously served as a Visiting Professor
at UCLA and Caltech. Author of more than 50 academic research and professional articles on taxation which have
appeared in such economics journals as the National Tax Journal, the Journal of Public Economics, and the Journal
of Law and Economics, Dr. Swenson has won the Tax Manuscript Award from the American Taxation Association
three times. He is author of two tax texts and is the General Editor of the treatise Bender’s State Taxation: Principles
and Practice (LexisNexis, 2009, updated quarterly). He has presented his economics-based tax research before the
California Senate Revenue and Taxation Committee, the California Assembly Committee on Jobs, and the City of
Los Angeles, and is on the Editorial Boards of the Journal of Accounting and Public Policy and the Asia Pacific
Journal of Taxation. His bio and curriculum vitae can be found at: https://www.marshall.usc.edu/personnel/charles-
swenson

2
Since the Governor’s Proposed Budget does not contain revenue estimates resulting from taxes on carried interest,
the $1.08 billion is net of this Report’s estimated revenues for some firms which chose to remain in New York and
pay the higher tax. Under any reasonable assumption however, the net loss to the State under this scenario would
still be considerable.
businesses are mostly partnerships or limited liability companies, which means that their taxes are paid by
owners (partners) of the business on their individual tax returns. Thus, increased taxes are in a large sense
a tax on the entrepreneurial efforts of the owners of private funds businesses. It is important to note that
the tax is discriminatory insofar as it does not appear to tax carried interest for other industries such as
real estate.

The study’s main findings are:

 Imposition of the tax will likely cause a complete exodus of the industry from New York;
 This exodus will result in a loss of 370,000 New York jobs; and
 The exodus will result in state and local governments losing $4.5 billion annually in tax revenues
(revenues used to fund other programs).

Direct Job Job Losses After Revenue Losses-

Losses Multiplier Effects First Second Third
Year Year Year

0 0
-500,000,000
-50,000
-1,000,000,000
-100,000 -1,500,000,000

-150,000 -2,000,000,000
-2,500,000,000
-200,000
-3,000,000,000
-250,000 -3,500,000,000
-4,000,000,000
-300,000
-4,500,000,000
-350,000
-5,000,000,000
-400,000