By: Mark Glennon*
Yes, I know. Stupid bills sometimes are introduced just so a sponsor can beat his chest for this or that constituency or keep some lobbyist happy.
But a pair of bills now pending in the Illinois General Assembly are so breathtakingly dumb — and have gotten so much traction — that serious questions have to be asked: What kind of legislator would even put his name on them? What kinds of policies are they trying to appetize voters for? Worse, based on how far they’ve gotten, these two bills appear to be serious.
They are House Bill 3393 and Senate Bill 1719. Each would impose a 20% tax on partnerships and S corporations engaged in the business of conducting investment management services. Both bills are very broad. They would apply to investment managers of all sorts — hedge funds, venture capital, private equity, money managers that pensions hire or invest in and even mom and pop investment advisors — all of which are usually organized in ways that would be covered by the bills.
Taxpayers Federation of Illinois President Carol Portman told INN yesterday that extra cost is likely to be passed down to customers via fees.”It might pick up your average little 2-3 adviser shop who provides that kind of service to regular folks,” Portman said. “As their costs go up, they are going to find a way to share that pain with their customers.”
The hit on venture capital firms would be so large that I’m confident most would leave Illinois. They supply the funding for one of the few sectors really working in Illinois — technology — and the bills would be devastating for that sector. The same goes for the entire private equity group, which manages billions of dollars out of Chicago.
It turns out this effort in Illinois is similar to efforts are underway in Connecticut, New Jersey, New York and Massachusetts. In fact, the Illinois bills only become effective if those states pass identical bills. If that’s intended to keep Illinois competitive, it’s mighty lame. You can be sure that Florida, Texas and plenty of other states would never consider something like this. New York, and maybe some others of those listed in the bill, would never pass this. However, you never know what the Illinois legislature may delete from bills like this at the last minute.
The hit these bills would have on private equity is no accident. It’s outright vindictiveness against an industry many on the left love to call “vulture capitalists.” That has led some to label it “the Rauner Tax” in light of Governor Rauner’s background in private equity. And you won’t be surprised to learn who is behind the multi-state effort: Teachers’ unions.
Now, there is an inkling of a valid idea behind the two bills. One purpose is to cancel out the “carried interest” tax break that managers of hedge fund, private equity funds and similar entities get on federal taxes. With that break, those managers pay capital gains rates on the bulk of their income, often allowing them to pay effective federal rates under 20% of their income. Both Illinois bills would be voided if the federal carried interest break gets eliminated. It’s not only progressives who don’t like the federal interest tax break. President Trump firmly stated his opposition during the campaign. I, too, think it’s far too generous.
One problem is the federal carried interest break may never be eliminated. It’s immensely complicated to undo and previous efforts in a Democratic Congress with a Democratic President have failed. And even if the federal break does get eventually eliminated, Illinois will still be placed at a huge competitive disadvantage during the interim and the state’s hostility to investment managers will have been made clear. You simply can’t undo federal tax policy unless the vast majority of states are aligned concurrently.
Illinois’ two bills can’t be dismissed as a token nod to naive progressives or teachers’ unions. The House bill has twenty sponsors. It cleared the House Revenue and Finance Committee on a party-line vote of 7-4 and could be heard in the full House in the near future. It was opposed vigorously in committee by two representatives who are among the few who understand finance, David Harris (R-Arlington Heights) and Dave McSweeney (R-Barrington). McSweeney put it bluntly when I contacted him today: “The tax raisers in Springfield are doing everything that they can to drive more people out of Illinois.”
Senate sponsors include Dan Biss, who is running for governor. He has gone hard left presumably thinking that’s a winning formula, which his bill would help support. He has to know better, but has subordinated concern for the state to his political ambitions.
Adding insult to injury, both bills label the tax they would create the “privilege tax.”
One guy I know who must be laughing his butt off about this is a former law partner of mine, Rick Scott, now Florida Governor. He has already been successfully recruiting financial services firms to move to Florida. Maybe these bills won’t become law, but foolish, spiteful proposals like this directed at the financial community are routine in Illinois. At some point, they’ll get tired of even fighting these morons and will be outta here.
*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.