EDITORIAL: Hedge Fund Tax A Bad Idea

April 18–A proposal to tax hedge funds and other managed investments at an outrageous 19 percent rate is a danger, not a benefit, to the state's financial future.

The bill, which would impose “a surcharge on income derived from investment management services,” would cover investors from all income levels.

What a terrible idea. Gov. Dannel P. Malloy and Republicans oppose it. Even Senate President Pro Tem Martin Looney, a Democrat who champions himself as a proponent of progressive taxation, understands the problem with the bill. In a meeting with The Courant's editorial board on Thursday, he warned about the effect such taxes have on the overall economy, saying that “when the very wealthy feel a bit of a chill … we get pneumonia, because we're so dependent on them.”

The hedge fund tax, he said, “could in fact drive those people out of the state.”

Hedge fund managers don't need to live in Connecticut. They can plug their computers in from any state. And some high-profile hedge fund managers have already left Connecticut for income- and estate-tax-free Florida.

Proponents say such a tax could raise more than $500 million. In a fiscal crisis such as this one, any money-making idea is bound to get some interest. But the corresponding loss in income- and sales-tax revenues from those who flee the state could account for far more than that.

The finance industry helps to provide a great deal of the state's income, especially from those who live in the hedge fund territory of Fairfield County. In 2013, for example, residents of seven Fairfield County towns — Greenwich, Stamford, New Canaan, Darien, Norwalk, Westport and Fairfield — paid more than $1.8 billion in state income tax. That was about 9 percent of the entire state budget.

Bruce McGuire, president of the Connecticut Hedge Fund Association, said the state has the third-largest concentration of hedge funds in the world and predicted that some firms “will leave Connecticut for other states” if the new tax is imposed.

Risking that is irresponsible. On the other hand, making Connecticut more friendly to high earners is a better way of encouraging investment here.

The bill doesn't seem to have much of a chance, especially since it requires New Jersey, New York and Massachusetts to pass similar legislation to discourage border-hopping.

But legislators, even those who call themselves progressive and want to help low-income residents, need to understand that the financial services industry is critical to the health of the state and pays for many of the services they desire.

Over-taxing the rich, especially in Connecticut, is counterproductive.

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