Carry tax hike a ‘super’ failure

Partisan gridlock has prevented a so-called ‘Super Committee’ of US lawmakers from agreeing a deficit reduction plan, preserving carried interest under capital gains tax in the short term.

US fund managers have dodged a tax bullet this week as a congressional “Super Committee” (the Joint Select Committee on Deficit Reduction) said it would be unable to meet its Wednesday deadline of finding budget savings of $1.2 trillion over 10 years.

The private funds industry feared a bipartisan agreement to reduce the nation’s deficit would include a change to the tax treatment of carried interest. Carry is taxed under a 15 percent capital gains rate, but Democrats, led by the Obama administration, say it should be treated as ordinary income, subject to a top income tax rate of 35 percent.

With no deal struck, a back-up process known as “sequestration” will trigger automatic spending cuts evenly between military and domestic government programmes beginning in 2013. Some lawmakers have suggested repealing that process, but President Obama on Tuesday said he would veto any attempt to do so.

Chances of a carry tax hike still loom over the medium term, said US trade body the Private Equity Growth Capital Council (PEGCC). The PEGCC said it would continue to engage Capital Hill as tax and spending debates still remain unresolved, increasing the tax risk to carry.

Committee co-chairs Representative Jeb Hensarling and Senator Patty Murray said in a statement: “Despite our inability to bridge the committee's significant differences, we end this process united in our belief that the nation's fiscal crisis must be addressed and that we cannot leave it for the next generation to solve”.