According to Reuters, New York is poised to assess a new income tax on hedge fund managers who work in New York but live elsewhere in the hopes of raking in an extra $50 million a year. They propose to do this by taxing carried interest– profits earned by managing assets– at ordinary income tax rates. Hedge fund managers who live in New York already pay these rates. Reuters notes:

New York state’s highest income tax rate of 8.97 percent for people who earn more than $500,000 a year tops the equivalent income tax rate of 6.5 percent in Connecticut.

And any hedge fund or private equity chiefs who decided to keep commuting to their offices in New York would be paying both states’ income taxes — on the same earnings.

Connecticut’s Republican governor, however, offered an alternative in letter to the New York Hedge Fund Roundtable, a trade group:

As lawmakers in Albany consider a proposal to vastly increase the tax liability of hedge fund professionals who work in New York – many of whom have already wisely decided to live in Connecticut – I would like to convey a very simple, yet heartfelt, message: Connecticut welcomes you!

Mayor Michael Bloomberg commented, “I think it’s the best thing that ever happened to Connecticut; I can’t think why every hedge fund wouldn’t pick up tomorrow and move”

According to Reuters, New York City, home to many of the mega-rich in the United States, relies heavily on taxing their income and job-creating spending in shops, theaters, florists and the like. A mere 5,000 people, whose incomes exceeded $4 million, paid nearly 39 percent of all the city’s income taxes in 2007.

Those qualifying for New York’s top tax bracket also will be paying higher income taxes due to two other provisions in the bill the state legislature is expected to enact as soon as Thursday. Eliminating property tax rebates for the mega-rich will add a few tenths of a percentage point to New York’s top income rate. And their charitable deductions will be reduced by half to 25 percent of their state income. These provisions may entice the wealthiest members of New York society, not just hedge fund and private equity managers, to flee to New Jersey or Connecticut.

Hedge funds and private equity executives, however, still face the risk, though it has failed so far, that Congress still might raise federal tax rates on their carried interest.

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