Washington – Once again, you carried interest today.
The last-minute removal by Senate Democrats of a provision in climate and tax legislation that would narrow what is widely referred to as the “interest-bearing loophole” is the latest gain for the private equity and hedge fund sector. Over the years, these companies have successfully lobbied for elimination of bills intended to end or reduce an anomaly in the tax code that allows rich executives to pay lower tax rates than many of their salaried employees.
In recent weeks, it looked like the interest could be scaled back, but last-minute intervention by Senator Kirsten Senema, D-Arizona, reversed what would have been a $14 billion tax increase targeting private equity.
Lawmakers’ failure to address a tax break that Democrats and some Republicans have said is unfair underscores the political power lobbyists wield in the finance sector and how difficult it is to change a tax law that members of both parties say is unfair.
In addition to eliminating the carry-over interest clause, the deal Democratic leaders struck with Ms. Senema included a 1 percent excise tax on stock buybacks and changes to a 15 percent minimum corporate tax rate in favor of manufacturers.
On Friday, the private equity and hedge fund industries hailed the development, calling it a win-win for small businesses.
“The private equity industry directly employs more than 11 million Americans, fuels thousands of small businesses, and provides the strongest pension returns,” said Drew Maloney, CEO of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state across our country.”
“We are pleased to see that there is bipartisan recognition of the role that private capital plays in business growth and the economy,” said Brian Corbett, CEO of the Managed Funds Association.
Carried interest is the percentage of investment gains that a private equity partner or hedge fund manager takes as compensation. In most private equity firms and hedge funds, the share of dividends paid to managers is about 20 percent.
Under current law, this money is taxed at a capital gains rate of 20 percent for those with higher incomes. That’s about half the rate for the top individual income tax bracket, which is 37 percent. The 2017 tax law passed by Republicans largely left the treatment of transferred interest as is, after an intense lobbying campaign, but it narrowed the exemption by requiring executives to hold their investments for at least three years in order to enjoy preferential tax treatment.
The agreement reached last week by Senator Joe Manchin III, Democrat of West Virginia, and Senator Chuck Schumer, the majority leader, would have extended that retention period to five years from three, while changing the way the period is calculated in hopes of reducing payers taxes. The ability to tamper with the system and pay a 20% lower tax rate.
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But Ms. Senema, who has been collecting political donations from wealthy financiers who usually donate to Republicans and has been nice to the idea of targeting, sparked interest last year, objected.
In the past five years, the senator has received $2.2 million in campaign contributions from investment industry executives and political action committees, according to Open Secrets. The industry was second only to retirees in giving to Ms. Sinema and ahead of the legal profession, which gave her $1.8 million.
For years, the transferred interest was a piñata tax policy that never opened up.
During the 2016 presidential campaign, Donald J. Trump said, “We’re going to eliminate the carry-on discount, the known discount, and other special interest loopholes that have been very good for Wall Street investors and people like me but unfair to American workers.”
When President Biden ran for president in 2020, his campaign said he would “repeal the special tax credits that reward special interests and get rid of the capital gains loophole for millionaires.” To do so, he said he would tax long-term capital gains at the top ordinary income tax rate, essentially eliminating the special treatment of interest charged.
A similar proposal appeared in Mr. Biden’s budget last spring, but when Democrats unsuccessfully tried to pass their “Build Back Better” legislation in the summer and fall, interest waned.
Jared Bernstein, a member of the White House Council of Economic Advisers, lamented the lobbyist’s victory.
“This is a loophole that needs to be closed completely,” Mr. Bernstein told CNBC last September. “When you go up on Capitol Hill and start negotiating taxes, there are more lobbyists in this city on taxes than there are members of Congress.”
There are close ties between Democrats and the private equity industry in general. Michael Shapiro, a lawyer married to Schumer’s daughter, recently quit his job at the Transportation Department and joined investment giant Blackstone in June as director of government affairs.
“Senator Schumer is a long-time champion of closing the loophole of portable interest and his support to do so is unquestioned,” said Justin Goodman, a spokesman for Mr. Schumer. “He has worked to the end to try to preserve the provision in the legislation and will continue to look for opportunities to repeal it.”
Blackstone spokesman Matt Anderson said Mr. Shapiro “will not engage in any advocacy before the Majority Leader or his office in connection with Blackstone’s business.”
Some analysts have been skeptical all along that lawmakers will actually change the treatment of the interest tax charged on the final bill. While it became a prominent goal, the change Democrats were seeking would have generated relatively little tax revenue compared to other provisions in the legislation, known as the Inflation Reduction Act.
Mobile attention has become a MacGuffin It’s a literary tool that authors use only to make plots more interesting,” said James Lussier, an analyst at Capital Alpha Partners, a Washington political research firm. “MacGuffin distracted from the really important things going on in the story to make the amazing result even more surprising at the end.”
Ms. Senema herself did not say much about the legislation or why she considered it so important to maintain the treatment of interest tax charged.
“We agreed to eliminate the carryover interest tax provision, protect advanced manufacturing, and promote our clean energy economy in the Senate Budget Reconciliation Legislation,” she said in a statement Thursday.
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