WASHINGTON — Once again, carried interest carries the day.
The last-minute removal by Senate Democrats of a provision in the Climate and Tax Act that would have narrowed what is widely referred to as the “carried interest loophole” represents the latest victory for the private equity and hedge fund industries. For years, those businesses have successfully lobbied to kill bills aimed at ending or limiting a loophole in the tax code that allows wealthy executives to pay lower tax rates than many of their salaried employees.
In recent weeks, it appeared the benefit could be scaled back, but a last-minute intervention by Senator Kirsten Sinema, an Arizona Democrat, averted a $14 billion tax increase targeting private equity.
Democrats and some Republicans say lawmakers’ failure to tackle a tax break unfairly cites political power wielded by lobbyists for the financial industry and how difficult it could be to change a tax code that members of both parties call inequitable.
In addition to scrapping the carried interest provision, the deal Democratic leaders are cutting with Miss Cinema includes a 1 percent excise tax on stock buybacks and changes to the 15 percent minimum corporate tax that favored manufacturers.
On Friday, the private equity and hedge fund industries hailed the development, describing it as a win for small businesses.
“The private equity industry directly employs more than 11 million Americans, fuels thousands of small businesses and provides the strongest returns for pensions,” said Drew Maloney, chief executive of the American Investment Council, a lobbying group. “We encourage Congress to continue to support private capital investment in every state in our nation.”
Brian Corbett, chief executive of the Managed Funds Association, said: “We are pleased to see that there is bipartisan recognition of the role that private capital plays in growing businesses and the economy.”
Carried interest is a percentage of an investment’s profits that a private equity partner or hedge fund manager takes as compensation. At most private equity firms and hedge funds, the share of profits paid to managers is around 20 percent.
Under existing law, that money is taxed at a capital-gains rate of 20 percent for top earners. That’s about half the rate of the top individual income tax bracket, which is 37 percent. A 2017 tax law passed by Republicans, after an intense lobbying campaign, left the treatment of carried interest largely intact, but narrowed the exemption by requiring executives to hold their investments for at least three years to enjoy preferential tax treatment.
Last week, a deal was struck between Senator Joe Manchin III, Democrat of West Virginia, and Majority Leader Senator Chuck Schumer, that would extend the retention period from three to five years, while changing the way the period is calculated in hopes of reducing taxpayers. ‘ System games and the ability to pay a low 20 percent tax rate.
What Democrats have in their climate and tax bills
A new proposal. The $369 billion climate and tax package that Senate Democrats proposed in July could have far-reaching effects on the environment and economy. Here are some key provisions:
But Ms. Cinema, who has been collecting political donations from wealthy financiers who typically donate to Republicans and was cool with the idea of targeting interest carried last year, objected.
Over 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 among retirees in giving to Miss Cinema and ahead of the legal profession, which gave her $1.8 million.
For years, carried interest was a tax policy piñata that never cracked.
During the 2016 presidential campaign, Donald J. Trump said, “We will eliminate the carried interest deduction, the well-known deduction and other special-interest loopholes that are great for Wall Street investors and people like me but unfair to Americans. workers.”
When President Biden ran for president in 2020, his campaign said he would “eliminate special tax breaks that reward special interests and get rid of capital gains loopholes for millionaires.” To do this, he said he would tax long-term capital gains at the ordinary top income tax rate, essentially eliminating the special treatment of carried interest.
A similar proposal appeared in Mr. Biden’s budget last spring, but as Democrats tried unsuccessfully to pass their “Build Back Better” legislation over the summer and fall, interest faded.
Jared Bernstein, a member of the White House Council of Economic Advisers, lamented that the lobbyists had won.
“This is a loophole that absolutely must be closed,” Mr. Bernstein told CNBC last September. “When you go to Capitol Hill and you start talking about taxes, there are more tax lobbyists in town than there are members of Congress.”
There is a close relationship between Democrats and the private equity industry in general. Michael Shapiro, a lawyer who is married to Mr. Schumer’s daughter, recently left his job at the Department of Transportation and joined investment giant Blackstone as director of government affairs in June.
“Senator Schumer has been a longtime champion of closing the carried interest loophole and his support for doing so is unquestionable,” said Justin Goodman, a spokesman for Mr. Schumer. “He worked until the end to try to put the provision into law and will continue to look for opportunities to eliminate it.”
Matt Anderson, a Blackstone spokesman, said Mr. Shapiro “will not engage in any advocacy before the majority leader or his office related to the Blackstone business.”
Some analysts were skeptical that lawmakers would actually change the tax treatment of carried interest in the final bill. Although it has become a high-profile goal, the change that Democrats sought would raise relatively little tax revenue compared to other provisions of the law, known as the Inflation Reduction Act.
“Vested interest has become the McGuffin of the IRA story,” said James Lussier, an analyst at Capital Alpha Partners, a policy research firm in Washington, describing it as a literary device that writers include merely to make the plot more interesting. “The MacGuffin distracts attention from the really important things happening in the story so that the shocking conclusion at the end is all the more surprising.”
Ms. Cinema herself said little about the legislation or why she felt it was so important to preserve the tax treatment of carried interest.
“We agreed to remove carried interest tax provisions, protect advanced manufacturing, and enhance our clean energy economy in the Senate Budget Reconciliation Act,” he said in a statement Thursday.