In March, California joined a small but growing number of states fighting back against last year’s enormously regressive Republican tax bill when Assemblyman Mike Gipson, D-Carson, introduced a bill that would close one of the most egregious pieces of the tax code, the carried interest loophole.
The fight to close this loophole — which allows private equity fund managers to reduce their tax bills nearly in half by having their earnings taxed as capital gains instead of income — will reveal which legislators serve the people and which serve their donors.
Many using this loophole are some of the world’s richest people, making more in one year than the average Californian makes in their entire lifetime, but pay a lower tax rate. It’s absurd, and it’s wrong. They pay 23.8 percent tax rate when they really should pay 37 percent.
While only a few thousand taxpayers in the whole country are able to take advantage of the loophole, it costs billions a year. In California, closing the loophole on the state level would bring in an estimated $1 billion a year for public schools. That’s a lot of money that we’ve been missing out on, and for no good reason.
Assembly Bill 2731 won’t discourage investment or kill jobs, because it won’t affect investors in private equity funds. They will continue to pay the capital gains rate on their returns. The legislation would only affect fund managers’ personal tax bills on their fees.
This loophole is so bad that it’s one of the few tax issues Democrats and Republicans agree on. During the 2016 campaign, President Donald Trump and other prominent Republicans campaigned on closing it. Unfortunately, they ended up leaving it virtually untouched in their massive giveaway to millionaires and corporations.
There are going to be lots of reports, sponsored by the private equity lobby, to try to confuse the issue and make it seem complicated. It’s not.
There are really only two things you need to know. One, California public schools need help. Our current funding structure is deeply flawed and leaves the state near the bottom of the country in per student funding. If California wants to continue leading the national economy, we need to invest in our children.
And two, by abusing the loophole, super-wealthy fund managers have managed to avoid paying nearly half of their rightful tax bill for decades.
The math is simple. The middle class has carried the burden for too long. Let’s close the loophole, because our state and our children deserve better.