A Rhode Island senator has proposed legislation that would impose a surtax on long-term assets and a fee on carried interest.
Under S. 2892, filed April 26 by Sen. Meghan Kallman (D), capital assets purchased before January 1, 2023, would be considered to be held for more than one year. For tax years beginning in 2023, some assets that are held for more than one year would be subject to a 2 percent tax, in addition to the state’s top income tax rate of 5.99 percent.
Under prior law, assets purchased before January 1, 2002, sold on or after January 1, 2007, and held for more than five years were subject to tax at rates varying from 0.83 to 2.33 percent instead of at the state's higher income tax rate. Legislation (H. 5983) enacted in 2009 began taxing gains as ordinary income for tax years beginning on or after January 1, 2010.
The bill would also impose a 19 percent "carried interest fairness fee" on income derived from investment management services, which would close the so-called carried interest tax loophole. According to the bill, investment management services include advising a business entity — including partnerships and S corporations — on the merits of purchasing or selling specified assets or arranging financing for such assets. The fee wouldn’t apply if at least 80 percent of the related assets are made up of real estate. Notably, the provision is contingent on Connecticut, New Jersey, and Massachusetts enacting similar legislation.
“The idea here is to make the tax code a little fairer,” while decreasing the racial wealth gap, Kallman told Tax Notes April 28. “Capital gains tend to accumulate overwhelmingly in white households.”
The bill would also create a tax on properties valued at $1 million or more that aren’t occupied by the property owner for the majority of the privilege year, which includes seasonal and vacation homes. The tax would be imposed at a rate of $5 for every $1,000 of the part of the property worth at least $1 million but less than $2 million. Properties worth more than $2 million would be subject to a rate of $6 per $1,000 of assessed value. The tax would be paid in four equal installments due by September 15, December 15, March 15, and June 15 of the tax year.
According to the bill, “Owners of non-owner occupied properties must be required, through a state’s power to tax, to pay a fair share of the cost of providing certain essential state services to protect the public health, safety, and welfare” because those properties can affect local tax bases and consequently raise the demand for some city services.
Kallman said the tax on second homes “is not designed to increase the tax burden on working people" and pointed to the proposal's origin under former Gov. Gina Raimondo, who had dubbed it the "Taylor Swift" tax on account of the singer's Rhode Island vacation home.
An official fiscal note is not yet available, but Kallman said the entire proposal could generate around $45 million.
A House version of the proposal (H. 7865) was filed March 4 by Rep. Edith Ajello (D). Both bills have been referred to their chamber's Finance Committee.