This is an archived article that was published on sltrib.com in 2016, and information in the article may be outdated. It is provided only for personal research purposes and may not be reprinted.
May 1's op-ed ("Raising capital-gains tax hurts Utah pensioners and families") co-written by employees of the Sutherland Institute and Americans for Tax Reform (Grover Norquist's "no new taxes for any purpose" lobbying organization) is wrong when it states that raising the tax on carried interest would impact participants in the Utah Retirement System.
Carried interest is a tax loophole available to a very small group of private equity firm investment managers. Historically these managers have charged an annual fee of 2 percent of the funds placed with them and 20 percent of the profits generated by investing the funds and additional borrowings. The managers pay themselves over 22 percent of the profits of the fund without making any investment other than their time. They have no money at risk in these endeavors. As the Internal Revenue Code is currently structured, these individuals pay a maximum rate of 25.2 percent on their earnings from managing the funds. Individual wage earners like you or me pay as much as 39.6 percent on a comparable level of earnings. Is this fair or equitable?
The writers of the opinion piece suggest that private equity managers would raise their fees if they were taxed at normal rates on their earnings, and this would impact Utah retirees who are beneficiaries of the Utah Retirement Fund. The Utah Retirement Fund, with more than 156,000 members, has significant investments in private equity, to the tune of $3.2 billion. Private equity investments are a small portion (9-10 percent) of a large pool of funds used only to pay a fixed monthly retirement benefit to individuals such as firefighters, police officers and judges based on their years of service and historical earnings. The firefighters, police officers and judges are not impacted by the earnings of the fund. The government entity providing the pension is responsible for ensuring an adequate pool of funds is available to meet future pension obligations and their future contributions to the pool would increase or decrease based on the funds investment performance.
Many participants in the URS have benefits that accumulate based on their personal contributions and their employers contributions to an investment account. These accounts are never invested in private equity.
Several very large pension plans have reduced or eliminated their investment in private equity due to high fees currently charged by asset managers. I think it is unlikely that private equity managers can raise their fees to compensate for elimination of the carried interest loophole.
Mike Washington is an investment advisor serving retail clients in Utah and the western United States. He lives in Park City.