New York State Passes Final Budget, Does Not Take on Hedge Funds

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Nearly breaking the record for delay, the New York Senate passed the final piece of its budget on Tuesday night. The most significant components of the $1 billion-plus revenue measure are the elimination of the sales tax exemption on clothing and footwear below $110 and a temporary reduction in the itemized charitable contribution deduction for households with incomes above $10 million. The bill however did not include a measure which had been considered to change the taxation of out-of-state hedge fund managers.

The legislation, which passed 32 to 28 on party lines, also includes a series of smaller measures such as expanded tax breaks for film production, an increase in the taxation of video gambling, new rules allowing casinos to stay open later, and laws forcing online travel companies to collect sales taxes on hotel rooms. The measure did not, however, include a provision allowing State of New York University schools to raise tuition rates.

The change in the itemized charitable deduction would raise $100 million in revenue by reducing the deduction from 50% to 25% for households with incomes above $10 million for three years including 2010. This builds on a change enacted last year which completely eliminated the use of itemized deductions for households with incomes over $1 million except for allowing them to deduct a maximum of 50 percent of their charitable contributions.

The failure to keep the $50 million tax change affecting out-of-state hedge fund managers represents a “rare concession” (in the words of The Wall Street Journal) by the New York Legislature to the wealthiest income earners. The measure would have changed the law to tax the carried interest of out-of-state hedge fund managers at ordinary income rates rather than the lower capital gains rates. It ran into controversy as the managers met with Connecticut officials to show their alleged willingness to take their businesses out of New York.

Besides the larger budget passage, the New York Senate also approved two other bills with important budgetary impacts. The first would allow for across-the-board cuts in spending if federal Medicaid and education funding is not approved by Congress (which seemed more in doubt before the Senate approved it Thursday). More problematically, the Senate passed a 4% property tax cap, which, although relatively loose compared to the one passed in New Jersey, still represents bad policy. If passed by the New York Assembly, this measure would only provide poorly targeted tax cuts while restricting the flexibility of local government to raise the revenue needed to provide basic services.

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