Christine Stuart photo
William Buhler, testifies in front of the Finance, Revenue, and Bonding Committee Friday (Christine Stuart photo)

Advocates for the poor and disabled told the Finance, Revenue, and Bonding Committee on Friday that they’ve found a way to raise $535 million a year in revenue by closing a federal tax loophole.

A loophole in federal tax policy allows highly compensated hedge fund managers and private equity managers to pay a capital gains tax rate of 20 percent, instead of the marginal tax rate of 39.6 percent for ordinary income.

Forcing these hedge funds to pay the 19.6 percent difference to the state could go a long way to closing the state’s budget gap, according to advocates.

They argued that it would only impact the state’s wealthiest individuals, and if other surrounding states adopted similar tax policies then there would be nowhere for these individuals to move in order to avoid paying the tax.

A similar bill introduced earlier this month in New York would make the tax increase contingent on the passage of corresponding legislation in Massachusetts, New Jersey and Connecticut. The New York legislation would be effective immediately upon passage of similar legislation in Connecticut, New Jersey or Massachusetts. There is no bill on this topic currently pending in Connecticut.

“The only reason that the federal tax loophole has not been fixed . . . is that wealthy individuals have lobbied extensively to maintain this special tax break relative to other individuals at the same high income level,” Sheldon Toubman, an attorney with New Haven Legal Assistance, said in his written testimony.

Lindsay Farrell, executive director of the Working Families Party, agreed.

She told lawmakers Friday to join the regional compact to close what is commonly referred to as the “carried interest loophole.” She said the hedge fund and private equity managers invest other people’s money, and then benefit from a loophole that was created to incentivize them to take risk themselves.

She said there’s no competitive disadvantage if other states decide to close the same loophole.

Derek Thomas, a fellow with Connecticut Voices for Children, pointed out the inequity in Connecticut’s current tax structure. He said a family making less than $25,000 a year pays 11 percent in state and local taxes, a family making between $46,000 and $76,000 pays 10.9 percent, and a family making over $1,331,000 — the top 1 percent — pays 5.5 percent.

Thomas argued against eliminating the estate and gift tax, which was the bill up for discussion Friday. He also supported closing the carried interest loophole.

William Buhler of the Better Choices Coalition said small businesses have been closing over the past few years and it’s because there is a lack of customers with spending money.

Buhler argued that Connecticut’s tax policies over the past few years haven’t benefitted the middle class — whose wages have been stagnant for three decades. That lowers consumers ability to spend money and keep these small businesses in business.

“People with low incomes have seen some real declines in their wages,” Buhler said. And “sales tax revenue hasn’t increased above inflation in 13 years.”

Buhler said the velocity of money has fallen to a record low and giving wealthier people tax breaks on the estate and gift tax wouldn’t benefit Connecticut’s economy.

“I think it’s very important to get money into the hands of people who are going to spend it,” Buhler said.

However, Rep. Jeffrey Berger, D-Waterbury, who co-chairs the Finance, Revenue, and Bonding Committee, said it’s unlikely the committee will approve such a policy this year.

“It’s an intriguing concept,” Berger said outside the committee room Friday.

However, it would increase the tax liability of some Connecticut taxpayers at a time when the legislature wants to send a clear message that “it’s not looking at specific tax increases,” Berger said.

“I don’t think it’s an issue we’ll address this year,” Berger added. “Maybe in the future.”

He suggested that the state would look at lowering the income tax rate, if it went forward with legislation to close the carried interest loophole.

But with state employee layoffs looming and a $220 million deficit this fiscal year and a $900 million deficit next fiscal year, advocates say the time is now to take action.