On Friday June 23, Governor Paterson’s press secretary confirmed via email that New York’s controversial proposal for an extra tax on hedge fund managers that do business in New York but live elsewhere has officially been taken off the table.

In an email, press secretary Morgan Hook wrote:

“The Governor re-submitted a revenue bill that does not contain the hedge fund tax, and he would prefer the legislature pass his version of the revenue bill.”

The so-called “hedge fund tax”, which Paterson and the New York State Legislature had originally proposed  in June, would have taxed at ordinary income rates  “carried interest” payments made to non-resident employees of hedge fund managers with offices located in New York.

However, Patterson faced fierce opposition from the industry, which decried the possible double taxation, and from Mayor Bloomberg, who warned against a mass exodus of New York hedge funds to Connecticut (whose governor Jodi Rell was more than ready to welcome NY managers with open arms).

Timothy Selby, president of the New York Hedge Fund Roundtable and an attorney at Alston & Bird LLP, said he welcomed Paterson’s decision.

“I am encouraged that our legislative body in New York was open-minded enough to see the likely consequences of an ill-conceived piece of legislation before it was too late,” he said. “This could have been the commencement of a tipping point that would gave been disastrous for New York City.”

Paterson intends to submit a proclamation on Wednesday aiming to call for a special session of the state legislature to consider measures required to complete the state budget. His press secretary confirmed:

“That [hedge fund tax] provision was removed and will be removed again when the governor submits a proclamation for special session for Wednesday when he calls the legislature back.”