Congress drops carried interest tax hike

House Ways and Means Committee chair Charles Rangel indicated he would abandon the carried interest provision in his recently passed bill, following passage of a Senate bill that, like Rangel’s, attempts to fix the Alternative Minimum Tax act – but without raising taxes on fund managers.

Lobbyists for private equity firms and other partnerships have scored a victory in the Capitol Hill battle over carried interest taxation. As Republicans and Democrats clash over how best to fix – and pay for – an outdated US tax measure, linking a carry-related provision to the legislation has apparently fallen from vogue.

The US Senate on Thursday overwhelmingly passed a bill that aims to fix the Alternative Minimum Tax act for the next year, but unlike a similar bill passed in the House, does not attempt to make up for related losses in revenue by raising taxes on alternative fund managers. The House bill proposed raising some $48 billion by taxing carried interest as ordinary income instead of as capital gains, more than doubling its tax rate, and by taxing compensation hedge fund managers defer to offshore bank accounts.

Partisan squabbling has ensued over the Senate’s abandonment of pay-as-you-go, or PayGo, rules to which Democrats had pledged to adhere. Many Republicans have said they will not support raising taxes to pay for abolition of the AMT, a tax they say was never intended to raise revenue. Charles Grassley, a Republican Senator from Iowa who has led the charge in pushing private equity tax legislation and is the ranking Republican on the Senate Finance Committee, said in a statement that this stance is regardless of whether or not he agrees with the principle behind the revenue raising provision(s).

Charles Rangel

In response to passage of the Senate bill, House Ways and Means Committee chairman Charles Rangel reiterated the need to counterbalance lost tax revenue and said the House would come up with a revised version of the bill it passed in November – but without the carried interest provision.

“We will make adjustments to the bill to address some of the political opposition in the Senate as it relates to bringing equity into the tax code for managers of [private] equity and hedge funds, but we will continue to pursue this issue,” Rangel said. “At this time we are looking to close a loophole where billions of dollars in offshore funds have escaped taxation.”