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The New York Senate ratified the bill without the divisive tax measure after Gov. David Paterson and Mayor Michael Bloomberg opposed the bill on concerns it will force affected hedge fund managers to relocate to other states, reported the Wall Street Journal.

Travis Proulx, a spokesman for the New York Senate, said Gov. Paterson has yet to sign the budget bill.

In another report, the New York Times disclosed that New York state lawmakers passed the budget on fears hedge fund managers may be swayed by the persistent wooing of rival state Connecticut with an offer of a better tax regime.

Under current New York laws, performance earnings of hedge fund managers are considered as capital gains and are charged with 15% tax. Lawmakers in Albany had proposed to reclassify these earnings as “ordinary” income which carries higher tax rate, the report said.

A Bloomberg report said that New York lawmakers backed away from their plan to raise an additional $50m a year by taxing hedge fund managers who work in the state, but live elsewhere.

Connecticut not giving up the fight yet
In her most aggressive move yet, Connecticut Gov. M. Jodi Rell issued handouts to participants of a dinner she hosted on August 2 at a posh waterfront restaurant in the upscale Darien entitled: "Connecticut: The Wise Choice,". In the handouts she compares the tax regimes of New York and Connecticut, as if the New York legislature was still considering the proposed carried interest tax, according to report by the Wall Street Journal.

According to the handout, a married Connecticut hedge fund manager earning $2m in management fees and $5m in carried interest, would be slapped with a 17.46% tax rate if they worked in New York. That same person would have a tax rate of only 6.28% if the manager worked in Connecticut.

About 20 people attended the dinner in Darien, including hedge-fund managers and members of Rell's staff such as, Lieutenant Gov. Michael Fedele and Joan McDonald, commissioner of Connecticut's Department of Economic and Community Development. The Wall Street Journal quoted Tim Selby, president of the New York Hedge Fund Roundtable and a partner at Alston & Bird LLP, as describing Rell as "a gracious host."

Brett Cohen of JGB Capital, with offices in Madison Avenue, commented after the dinner: "It's nice to be wanted. [In New York,] there's a hostile atmosphere of continuing to tax the finance firms. It's nice when a governor of a state says welcoming things. It's like a breath of fresh air."

Another dinner participant, Jeffrey Bortnick, a Fifth Avenue tax attorney, said he was there to see "whether it's worth it" for his clients to head to Greenwich.

Debate still on to stay or leave New York
Even with the New York legislature dismissing the carried interest tax, many hedge fund managers practicing in the state fear the threat still remains that the Senate will enforce a new tax measure against hedge funds in the future. Some hedge funds are still considering leaving New York, reported Forexlive.com.

But there are those who still consider New York as the best place for hedge funds. According to the latest finding from HedgeTracker.com, most hedge fund launches this year were from New York, followed by London, Hong Kong and Singapore. The study showed that at least 13 fund launches were recorded in New York from January to July, six in London, five in Hong Kong and three in Singapore.

-Komfie Manalo