Although New York City is perhaps better known as a financial hub, the nearby state of Connecticut is home to a number of prominent hedge funds (as well as the wealthy owners and managers of those funds). This has already been shifting: prominent managers like Edward Lampert of ESL Investments and Paul Tudor Jones of Tudor Investment Corp. have moved their operations out of Connecticut and to the state of Florida for tax purposes. Now, some of Connecticut's elected officials have stated their opposition to a proposal to increase tax levels on Connecticut-based hedge funds, saying that such a move will force out even more of the state's financial companies.

Governor Malloy and Republicans Speak Against the Bill

Connecticut's governor Dannel P. Malloy, a Democrat, and a number of the state's most prominent Republicans have spoken out against the bill, which asks for a 19% tax on hedge funds, according to reporting by the Hartford Courant. Their argument is simple: hedge fund managers would be more likely to move their operations to another state where the tax burdens aren't as high, and that would severely impact Connecticut's tax base. On the other hand, some Democrats have voiced support of the tax, including Representative Josh Elliott of Hamden. Supporters of the bill say that it could raise as much as $535 million in advance of the close of the fiscal year in July. This would be very helpful toward the goal of closing a $1.7 billion projected deficit in the state budget.

Bill Likely to Face Senate Trouble

The Connecticut Business and Industry Association, a collection of about 10,000 members, has strongly opposed the tax change as well, and now many analysts believe that the bill is likely to run into trouble in the state's Senate, which is closely divided and includes a number of fiscally conservative Democrats. If even one of those Democrats votes no on the bill, the entire operation could be sunk.

Connecticut currently has the third largest concentration of hedge funds in the world, sporting more than 400 funds with a total AUM of about $750 billion. The bill specifically requires a "surcharge on income derived from investment management services," so it would not be limited to just hedge funds. Nonetheless, hedge funds would probably be hit the hardest. Another uphill battle for the proposal is the stipulation that New York, New Jersey, and Massachusetts would need to each approve laws that are similar in order for the Connecticut bill to reach final approval. The reasoning in this case is that the proximity of these states would allow hedge funds to quickly and easily move their headquarters across state lines in order to avoid the new tax.