Carried Interest Issue Gathering Momentum in Congress

Congress's tax-writing committees have focused increasing attention this summer on a hitherto little-noticed tax preference enjoyed by private equity and other fund managers that allows them to pay capital gains rates (15 percent) on "carried interest" income they are paid to manage investment funds they do not own. This is significantly lower than the income tax rate that would otherwise be assessed, which could be as high as 35 percent. As Congress moves to take action to close this loophole, nonprofit advocacy groups are mobilizing to support a fix to this unfair aspect of the tax code. At the same time, powerful special interests are working to protect this tax break, which affects some of the wealthiest individuals in this country. Both the House and Senate have been busy investigating this tax loophole and developing solutions. The Senate Finance Committee held two hearings on the issue in July, and the House Ways and Means Committee will hold a hearing on it Sept. 6. In addition, a bill (H.R. 2834) to close the loophole has been introduced in the House by Rep. Sander Levin (D-MI) and is co-sponsored by powerful House committee chairs Charles Rangel (D-NY) and Barney Frank (D-MA). Recently, Rangel and others have raised the possibility that some form of the Levin bill may be paired with legislation reforming or patching the Alternative Minimum Tax (AMT), to help offset the cost. This has improved the odds that the carried interest issue may see floor action in Congress this fall. Rangel and Ways and Means Subcommittee on Select Revenue Measures Chair Richard Neal (D-MA) are known to be working on legislation to overhaul the AMT, which they are expected to introduce in the fall. The Senate will also debate AMT legislation, as Senate Finance Committee Chair Max Baucus (D-MT) and Ranking Member Charles Grassley (R-IA) have long sought to extend the "hold-harmless" patch freezing the number of taxpayers liable to AMT for one or two years. Baucus, who initially seemed cool to closing the carried interest loophole, appears now to have joined his Finance Committee colleague Grassley in support of the Levin bill in principle. Sen. Charles Schumer (D-NY), another influential member of the panel who represents New York City's sizable financial sector, is supportive of closing the loophole but wants to make sure the Levin bill will apply equally to managers of funds across all economic sectors. The scope of the bill and the amount of revenue it would bring in are not definitively established, but revenue estimates tend to fall in the range of $5-10 billion a year. The Levin bill has generated some media interest, with frequent op-ed pieces and editorials appearing in papers across the country, most of which endorse the bill. Private lobbying firms and the U.S. Chamber of Commerce have been busy lobbying Congress against the bill, arguing it discriminates against fund managers unfairly. But in the wake of the $4.3 billion Blackstone IPO in June, which showered fund managers with a windfall of untaxed profits, their views are not meeting with an outpouring of sympathy. Meanwhile, state, local and national nonprofit advocacy groups — including some of the country's largest labor organizations — have begun to organize support for the effort to close the carried interest loophole. OMB Watch has joined with these groups, signing on to a letter to legislators urging them to close this loophole. To sign your organization on, visit Citizens for Tax Justice's sign-up page.
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