On Friday, reports emerged that US Senate Democrats had agreed to remove a carried interest tax provision from the Inflation Reduction Act. Still, we’ve been here before, and we may be again. The debate over carried interest tax treatment is one that has reignited every few years, raising important questions over LP-GP alignment in the process.

Democrats had worked out a deal last week for the newly named Inflation Reduction Act, which once again sought to increase the time managers need to hold a given asset in order to qualify for capital gains tax treatment from three to five years.

This now seems off the table. The change would have only applied to those earning over $400,000 per year and was intended to generate $14 billion for the economy, according to the bill’s architects.

The arguments for and against such a move remain largely unchanged. Most GPs would probably prefer to be taxed at the capital gains rate of 20 percent rather than the normal individual income tax rate of 37 percent for the highest earners.

Eighty-one percent of fund managers and lawyers surveyed by Private Equity International last year said the changes would negatively affect their firm’s operations and 79 percent said it would harm the industry’s appeal for new talent.

One concern for GPs was the reintroduction to the bill of a ‘clock’, meaning that the five-year holding period doesn’t start until a fund has invested “substantially all” of its committed capital. Industry participants have raised concerns that such a requirement could kill the burgeoning continuation fund market.

“In Washington speak, that’s typically 80 percent [invested],” said one panellist at PEI’s CFOs & COOs Fall Forum in September, giving an example: “If you have a fund that owns three [portfolio] companies, bought in 2022, 2023 and 2024, [for] that company you bought in ’22, you actually can’t start the five-year clock until ’24.”

Another worry is that a higher tax rate might cause the interests of LPs and GPs to diverge. Nearly 70 percent of respondents to last year’s survey argued that a change would indeed hurt alignment. It might, for instance, disincentivise sponsors against realising investments early.

Of course, there are many other factors that inform the timing of an exit beyond an individual’s tax bill, including the fund’s life span and the market conditions into which you are selling. But a potential change to holding periods isn’t insignificant, even if longer periods, while reducing IRRs, tend to result in higher money multiples for investors.

Meanwhile, not everyone in the industry seems to understand what all the fuss is about. One LP we spoke to, an unnamed PE head at a sovereign wealth fund, was reasonably unperturbed by the proposals, insisting that for GPs, private equity would continue to be a lucrative occupation under any outcome.

“It’s a load of baloney,” the LP told us this week when asked about the looming ‘loophole’ closure. “GPs will do it [private equity investing] because it’s still a lot of money. All we’re talking about is taxing the profit… there’s still a profit motive.”

Update: An earlier version of this comment was published before Democrats reportedly agreed to drop carried interest from the draft Inflation Reduction Act.