Economic Impact Analysis: Proposed New York State

Tax Increases on Carried Interest of the Private Funds

Industry

Charles Swenson PhD CPA

April, 2019

1
Table of Contents

Executive Summary 3
Economic Contributions of Private Funds
Industry to New York 5
Employment Impacts of Private Funds
in New York 5
Tax Revenues to the State 7
Other Economic Impacts: Private Equity Firms 8

Other Economic Impacts: Venture Capital Firms 9

Other Economic Impacts: Hedge Funds 10

Taxation of Carried Interest 10

Proposed Legislation 10
Carried Interest 11

Magnitude of Carried Interest 13

Economic Impacts of Proposed Legislation 14

Disincentive Effects 14
Lost Jobs 17
Lost Tax revenues to the State 19
Sensitivity of Assumptions 22
Other Negative Impacts on the State 22
About the Author 23
Appendices 24
Appendix A: Trajectory of Job Losses Due to Proposed
Legislation 24
Appendix B: Trajectory of Tax Revenue Losses Due to
Proposed Legislation 25
Appendix C: Sensitivity Analyses 28

2
Executive Summary

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 and private fund investments 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 approximately 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), and Tate’s Bake Shop
(Southampton).

A bill in the current Legislative Session, S303, and the Governor’s FY2020 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, if enacted, 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

3
billion per year in the long run because of a tax on carried interest.1 Sensitivity analyses
indicate that if even 6% of the industry left the state, state and local governments would
lose money.

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 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 financial services 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 and other ventures.

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).

1Since 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.

4
Economic Impact of Private Funds in New York

Employment Impacts of Private Funds in New York

According to the Bureau of Labor Statistics, the private funds industry directly employs
approximately 134,000 New Yorkers.2 Employees include portfolio managers, research
analysts, investor relations personnel, compliance specialists, legal counsel, tax
specialists, information technology professionals, human resources staff, office support
staff, etc. The industry also has a significant “ripple through” or multiplier effect on the
New York economy as a whole. That is, the industry creates additional jobs and value
added through indirect and induced effects. These include, for example, such firms
paying accountants, attorneys, investments banks, consultants, real estate entities (for
leases, etc.), and the monies spent in the New York economy by the industry’s
employees and investors.

Employment, income, and output effects of the private funds industry, both before and
after multiplier effects, are shown in Exhibit 1 below. After such multiplier effects, the
industry accounts for more than 370,000 jobs and more than $4.5 billion in wages
paid.3 The average annual wage in this industry is more than $200,000, i.e., these are
“good paying” New York jobs.

Exhibit 1

2 Data from Bureau of Labor Statistics and Census. PE (and equivalent) plus hedge funds and venture
capital funds are contained in NAICS codes 523910, 523920, 523,990 and 525999. However, a number of
financial services firms in codes 523110 to 523210 appear to be subject to the proposed tax increase on
carried interest. Accordingly, such firms are also included in the above. If we only include NAICS codes
523910, 523920, and 525990, then employment is still a significant number (in excess of 100,000).
Hereafter, all analyses include the 134,000 employment and related industry statistics.
3 For a discussion of multiplier analysis in a tax setting, see Swenson, C., and M. Moore. "Use of Input-

Output Analysis in Tax Research." Advances in Taxation 1 (1987): 49-83.

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Estimated Employment, Income, and Output Effects of Private Funds in New York
(employment in thousands; dollar values in millions)

Impact Type Employment Labor Income Value Added Output

Direct Effect 133.6 $26,726.7 $25,748.0 $41,625.9

Indirect Effect 79.2 8,698.0 12,398.5 18,420.9

Induced Effect 157.2 9,629.6 16,927.9 25,802.5

Total Effect 370.0 $45,054.3 $55,074.4 $85,849.3

 “Direct Effect” refers to actual Employment, Labor Income (wages), Value Added
(added profit to owners in the local economy), and Output (revenues generated in
New York).
 “Indirect Effects” (often referred to as “type I multiplier effects”) are similar effects,
but measured as the impact on all of the New York economy, beyond the new
business itself, as a result of business-related purchases in the New York economy
rippling through the New York economy.
 “Induced Effects” (often referred to as “type II multiplier effects”) are similar
effects, but measured based on the result of direct and indirect effects on
employees, who then spend in the New York economy.
 The “Total Effect” is the total of direct, indirect, and induced effects. All values are
expressed in today’s U.S. dollars.

The above are calculated using IMPLAN4, a widely-accepted general equilibrium

software. Value added is proprietor’s income.

4 See www.IMPLAN.com. Multipliers are blends of the NAICS groups.

6
Tax Revenues to the State

The private funds industry accounts for a significant amount of New York state and local
taxes paid. Such taxes include income (individual, and corporate for other industries),
sales, property (real and personal), social insurance taxes (state unemployment, etc.),
and numerous other licenses and fees. Exhibit 2 shows taxes paid by this and other
industries after the multiplier effect is taken into account. All told, the industry
contributes almost $4.5 billion annually to state and local tax revenues.

Exhibit 2
Estimated Annual State and Local Taxes and Fees Generated by the Private Funds Industry
After Multiplier Effects5

Tax on
Employee Production
Description Compensation and Imports Households Corporations
Dividends $6,259,832
Social Insurance Tax-
Employee Contribution $46,275,106
Employer Contribution 92,583,976
Sales Tax $951,294,220
Property Tax 1,214,472,638
Motor Vehicle License 13,071,943
Severance Tax 528,621
Other Taxes 160,636,633
Other fees 3,677,187
Corporate Profits Tax $172,832,405
Personal Tax: Income Tax $1,530,740,622
Personal Tax: Fines- Fees 210,565,748
Personal Tax: Motor Vehicle
License 29,126,076
Personal Tax: Property Taxes 26,754,027
Personal Tax: Other Taxes
/Licenses 4,151,986

Total State and Local Tax $138,859,082 $2,343,153,622 $1,801,338,189 $179,092,237

$4,462,443,130

5 Ibid. Taxes on Proprietors’ Incomes excluded since tax losses are reported by the pass-through entities.

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Other Economic Impacts: Private Equity Firms and Funds6

Private equity (PE) firms invest in a number of New York companies via their funds.
Such investments are typically over a number of years, during which time the PE
fund aims to grow and strengthen the acquired company, and make it more
profitable for its investors. According to the American Investment Council, New York
PE companies invested $343.11 billion in New York companies over the 2008-2018
period. These companies had over 200,000 employees. Exhibit 3 shows some of the
more prominent PE-backed firms headquartered in New York.

Exhibit 3
Examples of PE-Backed Firms Headquartered in New York

6 Sources include Pitchbook (various issues) and industry representatives.

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PE companies often earn above-market returns for their investors. Nationally, pension
funds account for 47% of all PE investors; in New York, two of the State’s largest
pension funds—the New York State Common Retirement Fund and the New York City
Public Pension Funds—have invested approximately $26 billion in PE funds.7 Thus, PE
funds contribute significantly to the well-being of New York retirees. Private equity is
the highest returning asset class for the New York State Common Retirement Fund over
the short and long term. Last year alone, returns on private equity investment were
18.70%, exceeding public markets, fixed income, and real estate.

Other Economic Impacts: Venture Capital Firms8

Venture capital (VC) firms create funds that invest in start-up companies. These
investments typically occur over a period of years, during which time the VCs provide
business advice to help the startups succeed. New York is the heart of east coast VC

7Public Pension Study, American Investment Council (May 2018).

8Sources include Pitchbook, NVCA Venture Monitor and NVCA Yearbook as well as information
provided by the National Venture Capital Association.

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firms. These firms invest in numerous startup businesses, including the vibrant
technology and health sciences industries.

Other Economic Impacts: Hedge Funds

Hedge funds are investment vehicles that are similar to PE and VC firms in terms of
investors, structure, regulation, and management. However, private equity funds
generally buy controlling stakes in companies that are privately held, illiquid, and
have no readily available market value. These investments are generally held over the
long-term. In contrast, hedge funds generally invest in liquid securities (stocks and
bonds, commodity futures, options contracts, swaps, and other investments and
contracts) that generally have a readily identifiable market value. These positions can

be held for long or short-term periods.

They seek to provide returns to investors in excess of market averages, controlling for
risk. Investors include institutions, such as corporations, unions, and government
pension plans, which invest to create a diversified portfolio and to help fund pension
liabilities. Other investors include universities and nonprofit endowments, which
invest to help expand educational opportunities.

Taxation of Carried Interest

Proposed Legislation

The Governor’s FY2020 Executive Budget essentially subjects “carried interest” from
the private funds industry to a 17% tax on top of the regular 12.696% tax already paid
(composed of the top marginal New York state rate of 8.82% plus the top New York City
Rate of 3.876%). This provision would go into effect when and if substantially similar
legislation is adopted by Connecticut, New Jersey, Massachusetts, and, in the Governor’s

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proposal, Pennsylvania. So far, only New Jersey has adopted such a provision.9 S30310
would impose the carried interest tax at 19%.

Since these firms are usually organized as partnerships11, such carried interest earnings
are passed through to the general partners and included on their individual tax returns.
Existing state law imposes different personal income tax rates ranging from one percent
up to 8.84%, and New York City taxes range up to 3.876%. Thus, for almost all general
partners, the total state tax rate on carried interest would be 17%+12.696%, or 29.696%
under the Governor’s Executive Budget, and 31.696% under S303. Since under recent
federal legislation a significant portion of carried interest is now taxed as short-term
capital gains, at the same rates as ordinary income, the combined New York and federal
tax rate on carried interest for New Yorkers would be 29.696% state tax plus 23.8%
federal tax for long-term capital gains, and 29.696% state tax plus 40.8% federal tax for
short-term capital gains, under the Governor’s Executive Budget. Under S303 these
rates would be 2% larger.

Since state income taxes are no longer deductible for federal tax purposes above
$10,000, when taken together the combined state and federal tax on this income would
be well in excess of 50%: 53.496% for long-term capital gains and 70.496% for short-
term capital gains or ordinary income, under the Governor’s Executive Budget. Under
S303, these numbers would be 55.496% and 72.496%, respectively. This tax, combined
with current federal taxes, would result in a combined tax rate of up to 72.496% on the
industry, which would be among the highest tax rates in the world on any kind of
income.

9 New Jersey’s carried increase tax is also dependent on other states enacting similar tax increases before
it becomes active and none of those states have enacted such tax increases yet.
10 Introduced January 9, 2019 by Sen. Holyman.
11Notable exceptions are Ares and KKR which are now C corps.

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Carried Interest

Carried interest is a profit-sharing mechanism which rewards investors for the long-
term “sweat equity” investments they make in businesses. Carried interest is used in
real estate businesses, the financial services industry, oil and gas ventures, and many
other types of business partnerships. The concept is that general partners (or
managing members of LLCs) invest sweat equity, money and expertise in such
ventures along with limited partner investors who invest money in the ventures. If
the venture is successful, the general partners are entitled to a portion of the net profits
from the sale of such ventures, typically 20% only after the limited partner investors
are returned their capital plus a hurdle rate of return of 8%. It is worth noting that
both the Governor’s Executive Budget and S303 selectively discriminate by taxing only
carried interest in the private funds industry, while attempting to leave carried
interest earned in apparently favored industries such as real estate unaffected.

In the private funds industry, companies having carried interest are typically in the
private equity, venture capital and hedge fund fields. In this structure, the general
partners or managing members of a fund manage the operations of the fund while
limited partners are passive investors. General partners or managing members are
compensated for their services via a management fee (similar to a salary as a payment
for services rendered and taxed at ordinary income rates), often at 2% of assets under
management12. In addition, the General Partners retain a share of profits, which is not a
fee. The profits interest is typically set at 20% of gains earned by the fund once invested
capital is returned and a “hurdle rate” of return for limited partner investors (typically
8%) has been fulfilled. Limited partners receive the other 80% of the remaining profits.
In private equity, general partners only realize carried interest if gains exceed a certain
hurdle rate of return.

12Typically, it is 2% of committed capital and then it transitions into 2% of invested capital over the life of
a fund.

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 Since there is no special capital-gain tax rate in New York, all of the above earned by the
general partners is taxed at regular tax rates. For federal tax purposes, since the start of
the Federal Income Tax in 1913, carried interest capital gains have always been taxed as
capital gains income even though the capital gains rates have varied over time. Indeed,
carried interest tax treatment is consistent with the tax treatment afforded to other
long-term investments in capital assets and is founded on two sound and settled tax
policies. The first is that capital gains are designed to reward entrepreneurial risk-
taking. The second is that partnership profits should be taxed on a "pass-through"
basis. As recognized by the Joint Committee on Taxation in its description of the tax
treatment of carried interest, “The character of partnership items passes through to the
partners, as if the items were realized directly by the partners. Thus, for example, long-
term capital gain of the partnership is treated as long-term capital gain in the hands of
the partners.”13

Starting in 2018, however, the new federal tax law imposes differential treatment for
some long-term carried interest capital gains by changing the time window it takes for a
long-term carried interest capital gain to be realized from one year to three years.
Under this new law, a general partner’s carried interest capital gains is only taxed at
the lower long-term rates after three years. A general partner’s carried interest capital
gains on an asset held for less than three years are short-term capital gains, taxed at
the same rates as ordinary income. Limited partners’ share of profits, on the other
hand, can be fully taxed like all other long-term capital gains at lower rates after one
year.14

Magnitude of Carried Interest

Because there are revenue estimates provided by the State, this report provides a rough
estimate of the potential New York tax revenues generated by a tax on carried interest

13See https://www.cbo.gov/budget-options/2018/54795
14Note that limited partners that are non-taxable entities, for example pension plans, endowments and
charitable foundations are not taxed on these gains.

13
using federal estimates of carried interest. The Joint Committee on Taxation (as
reported by the Congressional Budget Office) estimated in 2016 that making carried
interest taxable at regular rates would generate an average of $1.4 billion in additional
federal tax revenues per year15. Since this would involve taxing carried interest generally
at the top U.S. rate of 40.8% instead of the capital gains rate of 23.8%, an estimate of
total carried interest nationally is $8.2 billion16. Apportioning this $8.2 billion to New
York and17 applying the 17% tax rate proposed in the Governor’s Executive Budget yields
an estimated $209 million in annual State tax revenues assuming no behavioral
adjustments such as tax avoidance , switching business forms, migration out of the
state, etc.18

Economic Impacts of Proposed Legislation

Disincentive Effects

Increased taxes have a disincentive effect on labor supply as well as business formation
and growth. Although the private funds industry is composed of businesses, such
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 financial services businesses. A considerable body of research
indicates that increased taxes on individuals have an especially high “elasticity”
response for individuals with higher incomes. That is, there is a significant percent
decrease in taxable income to percent changes in tax rates. For wealthier individuals,

15
https://www.cbo.gov/budget-options/2018/54795
16 Computed as $1.4 billion/(40.8%-23.8%). Over the 2019-2028 period total federal estimated revenues
from taxing carried interest as ordinary income are $14 billion; the $1.4 billion noted above is annual.
17 Apportionment is based using the number of establishments in the NAICS codes in the industry in New

York relative to the number of such establishments in the US; we get a similar ratio using the relative
number of employees in New York versus the US, for the industry.
18Similar effects are not reflected in the $2 billion number at the federal level.

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such responses can include moving to tax-favored jurisdictions, increasing tax
deductions, changing forms of business organization, increasing substitution of wages
for tax-free perquisites, increased use of retirement plans, and switching to lower-
skilled labor to perform tasks.19

Longer-run elasticities for high-income individuals have in the past been estimated at
.57%; i.e., each 1% increase in the tax rate results in a .57% decrease in pre-tax
income.20 Research has also shed light on the propensity of high-income individuals to
move to lower-tax-rate states in response to increases in state taxes. A recent study by
Moretti and Wilson (2017) shows that such individuals migrate to such states with an
elasticity of 1.8 in the long run.21 That is, for each 1% increase in state tax rates, there is
a 1.8% out-migration. Since Governor’s Executive Budget imposes a 17% tax increase,
and a conservative estimate of the fraction of partners’ incomes which is subject to
the new tax is approximately 90%22, this implies a 27.54% (or 1.8*17%*90%)
migration of financial services partners. Since such partners take their business
activities with them, this is also a 27.54% loss in business activity in this sector to the
New York economy. It is important to note that financial services is a “footloose”
industry: firms can move easily (facilities are typically leased, not owned), and their
activities can be done almost anywhere.

19 See for example Saez, E., J. Slemrod, and S. Giertz. "The Elasticity of Taxable Income with Respect to
Marginal Tax Rates: A Critical Review." Journal of Economic Literature 50, no. 1 (2012): 3-50.
20 See, for example Gruber, J., and E. Saez. "The Elasticity of Taxable Income: Evidence and

Implications." Journal of Public Economics 84, no. 1 (2002): 1-32.

21 Moretti, E. and D. Wilson (2017), “The Effect of State Taxes on the Geographical Location of Top

Earners: Evidence from Star Scientists.” American Economic Review, 107(7): 1858–1903. “Star
scientists” are similar to managing partners in the financial service industry for at least two reasons. First,
they are well educated, highly-productive workers with high income levels. Second, and more
significantly, their activities have potentially large consequences for local job creation. Unlike professional
athletes, movie stars, and rich, elderly people—the focus of some previous research—the presence of star
scientists in a state is typically associated with research and production facilities. Such facilities can
potentially stimulate the growth of entirely new industries, from biotech to software to nanotech.
Similarly, partners in the financial services industry create facilities and jobs in their new locations which
have significant multiplier effects on the local economy.
22 Because on publicly-available data exists on this ratio, I corresponded with industry representatives for

estimates. Note that the 2% management fees which partners receive are largely used to cover expenses of
running the business, thus remaining profits are generally carried interest. The 90% figure above is thus
conservative; it may be that under proposed taxes in New York 100% of firm profits become taxable, in
which case 30.6% of the industry’s firms would move. Also, the 1.8% effect estimated by Moretti and
Wilson may be non-linear here, implying that that the effect could be even larger than 30.6%

15
The above 27.54% loss in New York firms is likely to understate the effect of a carried
interest tax, however. The state tax rates examined in Moretti and Wilson (2017) were
in a relatively narrow range, i.e., nowhere near the 17% rate increase which would
occur under the Governor’s proposed tax.23 It is therefore likely, especially since
owners in these firms would face a 31.696% tax rate in New York (vis-à-vis a 0% rate
in some states), and combined marginal tax rates of up to 72.496%, that the entire
industry would migrate out of state. Such firms could easily migrate to nearby states
without a similar tax such as New Jersey, Connecticut, Massachusetts, or
Pennsylvania24. Alternatively, they could migrate to states without a personal
income tax such as Texas, Florida, or Nevada.25

An example of the negative effects of a high state tax includes the move of one of the
largest money management/hedge funds in the country, Dimensional Fund Advisors
(DFA), from Santa Monica, California, to Austin, Texas, in large part due to the
unfavorable California tax environment.26 In a similar vein, the Cato institute reported
that 27 of the 25 highest-tax states, 24 of them had net out-migration in 2016, and of the
25 lowest-tax states, 17 had net in-migration. The same Cato report noted that the
largest out-migration was from high-tax New York, whereas the largest in-migration
was to low-tax Florida.

23 Strong disincentive effects of state taxes were also found by Chris Edwards, a tax expert at the Cato
Institute, in a non peer-reviewed study. Using 2016 data from the Internal Revenue Service, he found that
578,269 people moved, on net, from the 25 highest-tax states to the 25 lowest-tax states. This resulted in a
loss of $33 billion in aggregate income for these vacated states. In that year, 24 of the 25 highest-tax states
suffered from net out-migration. The only high-tax state that saw in-migration was Maine. See
https://reason.com/archives/2018/09/20/state-migration-increasingly-driven-by-t.
24 Of course, if such states enact taxes similar to that proposed by New York, they would be unattractive

states to move to.

25 For example, industry partners could move to no-tax states such as Nevada, Texas, or Washington. Both

Texas and Washington have a vibrant technology base and may be attractive to PE and VC partners
specializing in the funding of tech ventures. Many non-tax costs, e.g., housing, are also lower in such
states compared to New York, making them attractive alternatives.
26 See How Money Walks: How $2 Trillion Moved Between the States, and Why It Matters (Travis H.

Brown, 2013), where DFA co-founder Rex Sinquefield discusses this.

27 Tax and Budget Bulletin No. 84 (Sept.6, 2018). See https://www.cato.org/publications/tax-budget-

bulletin/tax-reform-interstate-migration.

16
From a fiscal perspective, the above loss in business activity resulting from the
Governor’s proposed tax, or S303, also implies that there is a loss in overall New York
tax revenues. The aforementioned economic activity and tax revenue losses to the State,
due to a tax on carried interest, are shown in the next two sections.

Lost Jobs

Long-Run Impact (and worst case) Scenario

As a result of the above disincentives, the entire industry would leave the state in three
years. Direct industry employment is expected to drop by approximately 134,000 jobs
state-wide. After the multiplier effect on the economy, total state-wide losses would
exceed 370,000 jobs. This is shown graphically in Exhibit 4. Refer back to Exhibit 128
for details. Since there are approximately 9.2 million New Yorkers currently employed29,
the loss would be approximately 4% of the state’s workforce.

28We assume a shorter “long run” of three years, since the tax increases are much more dramatic than
those examined in Moretti and Wilson (2017). Projected job losses in years 1 and 2 are shown in
Appendix A.
29 Bureau of Labor Statistics (BLS), July 2018.

17
Exhibit 4
Most Likely Scenario: Estimated Loss in State-Wide Employment Due to Tax on Carried
Interest30

Direct Job Losses Job Losses After Multiplier Effects

-50,000

-100,000

-150,000

-200,000

-250,000

-300,000

-350,000

-400,000

Modest Exit (and best-case) Scenario

As a result of the above disincentives, there would be a 27.54% business loss under the
Governor’s proposed 17% tax rate. Here, direct industry employment is expected to drop
by more than 37,000 jobs state-wide. After the multiplier effect on the economy,
employment is expected to drop by 102,000, as shown in Exhibit 5.

30Both the direct and total employment losses are in the fourth year after implementation. Calculations
use IMPLAN. Using the migration trajectories calculated by Moretti and Wilson (2017), the first year
would show a loss of approximately 25,000 jobs, the second year would show a loss of approximately
50,000 jobs, and the third year would show a loss of approximately 75,000 jobs. Losses thereafter would
be approximately 102,000 jobs.

18
Exhibit 5
Modest Exit Scenario: Estimated Loss in State-Wide Employment Due to Tax on Carried
Interest31 (employment in thousands; dollar values in millions)

Impact Type Employment Labor Income Value Added Output

Direct Effect 36.79 $7,360.5 $7,091.0 $11,463.8

Indirect Effect 21.82 2,393.4 3,414.5 5,073.1

Induced Effect 43.29 2,651.9 4,661.9 7,106.0

Total Effect 101.90 $12,405.8 $15,167.5 $23642.9

The employment loss would be even larger—approximately 114,000 after multiplier

effects—if the 19% tax of S303 were imposed.

Lost Tax Revenues to the State

Long-Term Impact (and worst case) Scenario

As a result of the above disincentives, the entire industry would leave the state. After the
multiplier effect on the economy, total state-wide losses would exceed $4.4 billion per
year, as shown in See Exhibit 6.

31Both the direct and total employment losses are in the fourth year after implementation. Calculations
use IMPLAN. Using the migration trajectories calculated by Moretti and Wilson (2017), the first year
would show a loss of approximately 25,000 jobs, the second year would show a loss of approximately
50,000 jobs, and the third year would show a loss of approximately 75,000 jobs. Losses thereafter would
be approximately 102,000 jobs.

19
Exhibit 6
Long-Term Impact (and worst case) Scenario: Estimated Annual State and Local Taxes and
Fees Lost Due to Tax On Carried Interest After Multiplier Effects32,33

TOTALS (from Exhibit 2) $4,462,443,130

Less: additional taxes on carried interest 0
$4,462,443,130
Net loss to State

Sources of lost tax revenue include income (individual and corporate for other
industries), sales, property (real and personal), social insurance taxes (unemployment,
etc.), and numerous other licenses and fees, after multiplier effects on the economy.34
The estimated three year trajectory in annual revenue loss is shown in Exhibit 7.

Exhibit 7
Three Year Trajectory of Estimated Annual State and Local Taxes and Fees Lost
Due to Tax on Carried Interest After Multiplier Effects (worst case and most likely
scenario)

First Year Second Year Third Year

0
-500,000,000
-1,000,000,000
-1,500,000,000
-2,000,000,000
-2,500,000,000
-3,000,000,000
-3,500,000,000
-4,000,000,000
-4,500,000,000
-5,000,000,000

32Calculations using IMPLAN. See other notes to Exhibit 2.

33In the long run, there would be no collections of this tax due to all firms exiting the state Net tax losses
to the state for years 1 and 2 are shown in Appendix B.
34Here the long run is in three years. State revenue losses for years 1 and 2 are shown in Appendix B.

20
Modest Exit (and best-case) Scenario

As a result of decreased economic activity due to a tax on carried interest, state and local
tax revenues are expected to drop by approximately $1 billion per year in the long run,
as shown in Exhibit 8.

Exhibit 8
Modest Exit (and best case) Scenario: Estimated Annual State and Local Taxes and Fees
Lost Due to a Tax on Carried Interest After Multiplier Effects35, 36

Tax on
Employee Production
Description Compensation and Imports Households Corporations
Dividends $1,723,958
Social Ins Tax-
Employee Contribution $12,744,164
Employer Contribution 25,497,627
Sales Tax $261,986,428
Property Tax 334,465,765
Motor Vehicle Lic. 3,600,013
Severance Tax
Other Taxes 44,239,604
Other Fees 1,012,697
Corporate Profits Tax 47,598,044
Personal Tax: Income Tax $421,565,967
Personal Tax: Fines- Fees 57,989,733
Personal Tax: Motor Vehicle License 8,021,321
Personal Tax: Property Taxes 7,368,059
Personal Tax: Other Tax/license 1,143,457
Total State and Local Tax $38,241,791 $654,304,537 $496,088,537 $49,322,002
TOTALS $1,228,596,838
Less: additional taxes on carried interest 151,441,400
Net loss to State $1,077,155,438

35These are estimates for the fourth year after implementation. Calculations use IMPLAN. Using the
migration trajectories calculated by Moretti and Wilson (2017), 27.54% of the firms would have exited the
state in the long run (over four years).
36Taxes on Proprietors’ Incomes excluded since tax losses are reported by the pass-through entities.

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Sources of lost tax revenue include income (individual and corporate for other
industries), sales, property (real and personal), social insurance taxes (unemployment,
etc.), and numerous other licenses and fees, after multiplier effects on the economy.
Note that the actual losses are approximately $1.23 billion, but we subtract expected
potential taxes on carried interest revenue of approximately $198 million from private
funds firms that are expected to remain in the state.37

We see that under every scenario, the State would lose at least hundreds of millions of
dollars of revenue with a tax on carried interest, which suggests that unless revenues
are raised from other sources, state and local programs may need to be cut.

Sensitivity of Results to Assumptions

Appendix C performs sensitivity analyses to assumptions used in the foregoing analyses.

Calculations show that if as little as 6 percent of private funds companies exit the state
due to the tax increase, New York state and local governments will “lose money.” The
Appendix also shows that even in very conservative scenarios, the tax is expected to lose
a minimum of 22 thousand jobs.

Other Negative Impacts to the State

The aforementioned documents the potential loss in New York jobs and tax revenues
from a tax on carried interest. But there may be additional negative effects. For example,
New York’s vibrant tech sector has spawned a number of significant companies. A
significant reason for the agglomeration of tech companies is the localized access to
capital, primarily the state’s VCs and PEs.38 Should these VCs or PEs move out of state,
it is conceivable that fewer tech companies will start up, develop or remain in the state,

37 Recall that the potential revenue from carried interest is $209 million before any “behavioral”
responses by firms. Since 27.54% of financial services firms are expected to migrate out of state, revenues
would thus be 72.46%*$209 million, or $151,441,400.
38 The reader is referred to Gornall, W., and Strebulaev, I. (2015). “The Economic Impact of Venture

Capital: Evidence from Public Companies.” (working paper; available at

https://ssrn.com/abstract=2681841 ) for a discussion of the importance of VC backing to jobs, R&D
spending, and other economic factors in the US as a whole.

22
thus hurting this sector and the State’s long run economic growth. Many VC firms
require their funded startups to locate near them to make management oversight easier.
If VCs move out of state, such startups would locate outside New York as well. For
example, if even one Google-type firm choses to start up outside of New York, the
opportunity costs to the state (and its tax base) would be significant.

Finally, while difficult to quantify, an “unseen” effect of a tax on carried interest is the
number of new investment firms that will not locate in New York in the future. As
current professionals and firms retire or eventually relocate, there will be few if any new
firms or professionals to replace them. The industry is dynamic and new firms form
frequently, often as spin offs from existing ones. Firms may quickly realize that
recruiting talent to a state with a 17% (or 19%) surtax is impossible, so new firms will
locate elsewhere and the tax base from carried interest could conceivably decline to zero
over time. As a result, the quality or longevity of any remaining private funds tax base
will be low.

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About the Author
Charles (Chuck) Swenson, PhD, CPA, is Professor and Leventhal Research Fellow
at the Marshall School of Business at the University of Southern California, where he
has taught since 1987. Chuck 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 New York Senate Revenue and
Taxation Committee, the New York 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

24
Appendices

Appendix A: Trajectory of Job Losses From a Tax on Carried Interest (most

likely, and worst case scenario)

Exhibit A1
Estimated Loss in State-Wide Employment Due to a Tax on Carried Interest--FIRST YEAR
After Implementation (employment in thousands; dollar values in millions)

Impact Type Employment Labor Income Value Added Output

Direct Effect 44.5 $8,089.9 $8,8582.7 $13,875.3
Indirect Effect 26.4 2,896.9 4,132.8 6,140.3
Induced Effect 52.4 3,209.9 5,642.6 8,600.8
Total Effect 123.3 $15,015.7 $18,358.1 $28,616.4

Exhibit A2
Estimated Loss in State-Wide Employment Due to A Tax on Carried Interest--SECOND
YEAR After Implementation (employment in thousands; dollar values in millions)

Impact Type Employment Labor Income Value Added Output

Direct Effect 89.1 $17,817.7 $17,165.3 $27,750.6
Indirect Effect 52.8 5,793.7 8,265.7 12,280.6
Induced Effect 104.8 6,419.7 11,285.3 17,201.7
Total Effect 246.7 $30,031.3 $36,716.3 $57,232.9

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Appendix B: Trajectory of Tax Revenue Losses From a Tax on Carried
Interest
(most likely, and worst case scenario)

Exhibit B1
Estimated Annual State and Local Taxes and Fees Lost Due to a Tax on Carried Interest
After Multiplier Effects-- FIRST Year After Implementation

Employee Tax on Production

Description Compensation and Imports Households Corporations
Dividends $2,086,611
Social Ins Tax-
Employee Contribution $15,425,036
Employer Contribution 30,861,325
Sales Tax $317,098,073
Property Tax 404,824,213
Motor Vehicle Lic 4,357,315
Severance Tax
Other Taxes 53,545,878
Other fees 1,225,729
Corporate Profits Tax 57,610,802
Personal Tax: Income Tax $510,246,874
Personal Tax: Fines- Fees 70,188,493
Personal Tax: Motor Vehicle License 9,708,692
Personal Tax: Property Taxes 8,918,009
Personal Tax: Other Tax/license 1,383,955
Total State and Local Tax $46,286,361 $780,051,207 $600,446,063 $59,697,413
TOTALS $1,487,481,044
Less: Taxes on Carried Interest $ 182,303,107
Net Loss to State $1,305,177,937

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Exhibit B2
Estimated Annual State and Local Taxes and Fees Lost Due to a Tax on Carried Interest
After Multiplier Effects-- Second Year After Implementation

Employee Tax on Production

Description Compensation and Imports Households Corporations

Dividends $4,173,221
Social Ins Tax-
Employee Contribution $30,850,017
Employer Contribution 61,722,651
Sales Tax $634,196,147
Property Tax 809,648,426
Motor Vehicle Lic 8,714,629
Severance Tax
Other Taxes 107,091,756
Other fees 24,514,28
Corporate Profits Tax 115,221,603
Personal Tax: Income Tax $1,020,483,748
Personal Tax: Fines- Fees 140,376,985
Personal Tax: Motor Vehicle License 19,417,384
Personal Tax: Property Taxes 17,836,019
Personal Tax: Other Tax/license 2,767,991
Total State and Local Tax $95,572,722 $1,562,102,415 $1,200,892,126 $ 119,824,396
TOTALS $2,974,962,089
Less: Taxes on Carried Interest $91,50,557
Net Loss to State $2,965,811,532

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Appendix C: Sensitivity Analyses

Sensitivity to Assumed Response Rate to Increased Taxes

Recall that under the most optimistic setting, we assume a 1.8% change in owner
migration (therefore an equivalent change to business activity in the State) for each 1%
change in tax rates. We can solve for the minimum response rate to tax increases before
the state and local governments start to lose tax revenues. We solve:

$273,450,292 *(1-x) -$4,462,443,130*x=0, (C1)

where x=% response rate to taxation, $273,450,292 is the presumed gain to the state on
the new tax on carried interest (without behavioral responses), and $4,462,443,130 is the
total state and local tax revenue generated by the industry (after multipliers, and before
behavioral responses).

Solving, we get x=.06, or approximately six percent. Thus, if more than 6% of firms leave
the state due to the tax increase, state and local governments will lose money. Even at the
ten percent “breakeven” level, the state will still lose over 22 thousand jobs after multiplier
effects.

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