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  • NJ A3868
  • Imposes corporate business tax and gross income tax on income attributable to certain investment management services that a corporate or individual partner provides on behalf of a partnership.
In Committee
Crossed Over
2016-2017 Regular Session
This bill taxes income attributable to certain "investment management services" that an individual partner or corporate partner provides on behalf of a partnership. The intent of the bill is to ensure that a possible "carried interest loophole"' is not used under New Jersey tax law. "Carried interest" is the term commonly used to describe an investment manager's share in the net profits of an investment fund in excess of any amount contributed by the manager to such fund. When an investment manager organizes a fund and provides management services to it, the manager usually receives a share of the fund's future net profits (a "carried interest"), along with a fixed management fee. The investors who provide most of the capital for the fund share the rest of the fund's future profits. Under current federal law, each investor's share of the fund's net profits, including the investment manager's share, generally is taxed at the lower rate for capital gains (rather than at ordinary income tax rates). Simply stated, the carried interest loophole has the effect of treating hedge fund and private equity fees as capital gains, rather than ordinary income. Hedge fund and private equity funds are usually structured as partnerships. The fund manager is the general partner of the funds, the investors are limited partners. Investors often supply the majority of the capital, and the fund manager is supposed to supply investment expertise. Investment managers charge certain fees for the services they provide. In both hedge funds and private equity funds, the standard fee structure is "2 and 20" - meaning two percent of the fund assets per year are taken as the management fee, which covers operating costs, while 20% of all gains over a certain benchmark rate are taken by the fund manager as the performance fee. To many, this 20% fee appears to be compensation for services. If the federal income tax treated the performance fee as compensation for services, it would be taxed as ordinary income, where the highest marginal tax rate is currently 39.6%. Instead, many fund managers treat this fee as an investment profit. But profits on investments held longer than one year receive preferential treatment in the federal income tax code, with the highest marginal rate on long-term capital gains set at 20%. Thus, at the federal level this income is taxed at a 20% rate and not a 39.6% marginal rate, escaping a marginal tax rate of about 19.6%. In order to ensure that the carried interest loophole does not penetrate New Jersey's taxes on income from such services, the bill defines this source of income as investment management services income so that income that might be claimed by fund managers to be nontaxable income from intangibles, is clearly identified as taxable income for both corporate and nonresident and resident individual partners. The bill has a unique effective date mechanism so that the proposed changes would take effect only upon the enactment into law of other states' legislation having an identical effect in the states of Connecticut, New York, and Massachusetts. This is intended to complete a multi-state level effort to close the loophole so that fund managers could not avoid the tax by simply moving to a nearby state. In addition, the bill also implements a 19% surtax as a "carried interest fairness fee"' under the gross income tax and the corporation business tax. This surtax aims to "repatriate" the federal income tax lost at the federal level back to the states. However this 19% "carried interest fairness fee" will only remain in effect until such time as the Director of the Division of Taxation determines that the United States Congress has passed and the President of the United States has signed legislation having an identical effect with this act applicable to such income earned in all of the states and territories. Thus, this state level effort will end if the loophole is closed at the federal level nationwide.
2nd Reading in the Assembly, Budget and Appropriations, Passed Assembly
Received in the Senate, Referred to Senate Budget and Appropriations Committee  (on 6/12/2017)
Date Chamber Action Description
6/12/2017 S Received in the Senate, Referred to Senate Budget and Appropriations Committee
6/8/2017 A Passed by the Assembly (47-26-2)
10/27/2016 A Reported out of Assembly Committee, 2nd Reading
10/27/2016 Assembly Appropriations Hearing (13:00 10/27/2016 Committee Room 11, 4th Floor)
6/2/2016 A Introduced, Referred to Assembly Appropriations Committee
Date Motion Yea Nay Other
Detail 6/8/2017 Assembly Floor: Third Reading - Final Passage 47 26 7
Detail 10/27/2016 Assembly Appropriations Committee: Reported Favorably 8 3 0