With the enactment of the 2017 tax reform reconciliation act, amendments were made to the treatment of carried interest for federal income tax purposes. Often previously referred to as the perceived ‘carried interest loophole,’ the federal changes allow long term capital gains rates to apply to carried interest if certain criteria are met. However, for some states it does not appear that these federal amendments sufficiently close the perceived ‘loophole.’ Over the past few months Illinois, New Jersey, New York, and Rhode Island have proposed legislation that would impose a state level tax on carried interest. With the introduction of AB-2731 (the bill) on February 15, 2018, California joined the growing list of states with pending carried interest legislation.
As this is a revenue raising bill, a two thirds majority vote will be required in both the California State Assembly and the California State Senate to pass the legislation. The bill likely has an uphill battle given that the Democrats recently lost their supermajorities in both the Assembly and Senate. Further, California has a projected $13.5 billion budget surplus for the fiscal year ended 2019, and California already has the highest personal income tax rate of any State.