The Honorable Andrew Cuomo

Governor of the State of New York

State Capitol
Albany, NY
12224

January 15, 2018

Dear Governor Cuomo,

We are the Patriotic Millionaires, a group of wealthy individuals deeply concerned about our
country’s destabilizing concentration of wealth and power.

New York is an innovative state. As you continue to lead and inspire the nation, we urge you to
close the carried interest tax loophole as part of this year’s state budget.

Closing that loophole - a fundamental mischaracterization of income that allows for fund
managers to pay a tax rate that is half what every other working American pays - would capture
an estimated $3.5 billion (please see attached) in tax receipts for the great state of New York.

We strongly encourage you to include language to close the loophole in the budget bills
you will be submitting to the Legislature tomorrow, and we stand ready to work with you
to pass these bills into law.

By doing so, other states in the Northeast with similar measures - New Jersey, Massachusetts,
Connecticut, and Rhode Island - will be pressed to pass their own carried interest
loophole-closing legislation more quickly. Since New York is the national center of private equity
and hedge fund activity, your leadership on this critical issue is vital.

Quick passage of this bill means additional revenue for your priorities for New York: education,
housing, job creation, healthcare improvement, and infrastructure that could potentially start
flowing as soon as next year.

There is widespread support for closing the carried interest tax loophole - indeed every major
2016 presidential candidate made it part of their campaign. But since Congress just passed a
major tax bill that fails to close this loophole, it is critical that the states take this matter up.

In every state there are many budgetary needs, and with the state bill, New Yorkers could
immediately start seeing additional revenues that you and your colleagues could put into the
public services that need it most in your state.

1701 K Street NW, Suite 750 • info@patrioticmillionaires.org • 202.446.0489 

The carried interest loophole is the poster child for money overcoming logic and decency in our
public policy process. This loophole benefits a few thousand of the richest Americans while
offering absolutely no economic benefit to anyone else. By closing it in New York, you can lead
the nation in restoring a sense of fairness to our tax code.

Over a billion of dollars in campaign contributions and lobbying over the past decade have
succeeded in blocking action on carried interest in Washington, giving New York State a unique
opportunity to demonstrate to the American people that government is capable of working for
the people, not just for a wealthy few.

At a time when our national political system is fraught with uncertainty, we respectively urge you
to lead the way on this critical issue.

Yours in service,

Morris Pearl
Chair

1701 K Street NW, Suite 750 • info@patrioticmillionaires.org • 202.446.0489 

 Assets Under Expected Expected Incenti Expected aggregate fund Tax Expected carried
Halved
Management return annual return ve fee manager annual earning rate interest loss

H $3,088,400,3 $90,490,130,1 $6,786,759 19.6

2.93%
F 45,317.00 17 15% $13,573,519,517 ,758 0% $1,330,204,912

P $1,115,392,2 $147,901,016, $11,092,57 19.6

13.26%
E 82,823.00 702 15% $22,185,152,505 6,252 0% $2,174,144,945

TOT
AL: $3,504,349,858

Methodology:
The “master list” of all fund registered investment advisors were obtained from the SEC. Data for
Schedule D of Question 7(b)(1) of the investment advisor public disclosure for the previous five filing
quarters was matched, using the reference ID field, with firm data provided Question 1. Matched data
was then de-duplicated by file date and reference ID, yielding 37,602 unique funds. Of these, 14,060
were managed by registrants who listed their principal office within New York State. Exempt reporting
advisors were totaled similarly, and comprised 504 hedge funds and 430 private equity funds.
Combined, these New York hedge funds reported gross assets under management of $3.08T, while New
York private equity funds had $1.15T.

To estimate total earnings, we used private equity and hedge fund return benchmarks for a five year
period. One uses the five year average of leading hedge fund and private equity benchmarks, assuming
that the large state sample sizes roughly track the mean. For hedge funds, we used the HFRI Fund
Weighted Composite’s 36 month average.1 For private equity, we used the Cambridge Associates U.S.
Private Equity Index 5 year end-to-end pooled return published Q4 2015.2 By multiplying the return
benchmarks by the AUM, we came up with a rough estimation of expected annual earnings.

Next, the carried interest apportioned to hedge fund and private equity managers is estimated. Carried
interest applies only to the incentive fee earned by hedge fund and private equity managers. We used
15% of the total of hedge fund and private equity expected annual earnings to arrive at the expected

1
​https://www.hedgefundresearch.com/family-indices/hfrx#

http://40926u2govf9kuqen1ndit018su.wpengine.netdna-cdn.com/wp-content/uploads/2016/05/Public-2015-Q4-
US-Private-Equity.pdf

1701 K Street NW, Suite 750 • info@patrioticmillionaires.org • 202.446.0489 

aggregated fund manager annual earnings. We went with 15% because we believe this number to be
extremely conservative. With hedge funds, 20% is the industry standard and 17.14% was the industry
average for new funds launched in 2013, as tracked by Preqin.3 In private equity, the 20% standard is
prevalent in 85% of commingled funds, according to a 2015 report by Preqin.4 Separate accounts, where
approximately one-third of investor capital was committed in late 20145, are less likely to charge a 20%
carry, although 90% charge 10% or more6.

To calculate the amount lost to carried interest exemptions, we halved the expected aggregate fund
manager annual earnings. This was done to reflect the individual reporting of taxes paid on partnerships
interest in financial service partnerships. As Professor Victor Fleisher discovered in his work on the
subject, the IRS Statistics of Income shows that roughly half of financial industry partnership income is
paid at the favorable carried interest rate.7 8

After halving this sum, we multiplied the remaining amount by 19.6%, the difference between the top
bracket for short-term capital gains (equivalent to ordinary income, at 39.6%) and the top bracket for
long-term capital gains (20%).

3
​https://www.preqin.com/blog/0/8340/hedge-funds-fees

4
​https://www.preqin.com/docs/press/Fund-Terms-Sep-15.pdf

http://www.pionline.com/article/20141222/PRINT/312229973/assets-invested-in-separate-accounts-starting-to-a
dd-up

6
​http://www.valuewalk.com/2015/09/48-of-private-equity-separate-accounts-charge-a-20-performance-fee/

7
​56% of the income generated by finance and insurance partnerships in 2012 was taxed at this rate

8
​www.nytimes.com/2015/06/06/business/dealbook/how-a-carried-interest-tax-could-raise-180-billion.html

1701 K Street NW, Suite 750 • info@patrioticmillionaires.org • 202.446.0489