Just as the corporate debt market grinds to a standstill, Washington's interest in private equity has accelerated.
In the past two months, Congressional committees have drawn standing room-only crowds as they examine the tax schemes surrounding carried interest and publicly traded partnerships. Legislators from both parties seem to be racing to author, endorse and issue statements on related bills (even before attending exploratory hearings). Nearly every Democratic presidential candidate, including ex-Fortress advisor John Edwards, has weighed in, condemning what they characterise as tax loopholes benefiting the uber-wealthy. And all the while private equity-backed tax lobbyists have been swarming Capitol Hill.
The latest twist came in the form of the Senate Finance Committee's second hearing on carried interest, which saw political sparring between two of the committee's senators.
Within the first 30 minutes or so of the 31 July hearing, the seven testifying witnesses quickly drew lines in the sand. A venture capitalist and three tax law professors maintained that carry should be taxed as ordinary income because it is, in essence, a management compensation fee. Stetson University professor Darryll Jones went so far as to suggest that carried interest is to the tax code “what Abu Ghraib was to the Iraq war”.
Two alternative asset pros and a real estate partnership president argued on behalf of maintaining current capital gains tax treatment for carry.
Chairman of the Private Equity Council and Carlyle Group managing director, Bruce Rosenblum, said that carried interest is not a performance fee but an ownership incentive.
“We are co-owners with our limited partners, not their employees,” Rosenblum said, noting that GPs contribute substantial cash and intangible resources to their funds. “Capital gains treatment has never been tied to either the amount or proportion of capital at risk.”
Adam Ifshin, president of DLC Management Corp, an owner and operator of more than 70 shopping centres in 23 US states, agreed with Rosenblum that increasing the tax on carry would result in fewer firms willing to take long-term risks and could have an effect on returns for limited partners like pensions and endowments.
William Stanfill, founding partner of Denver-based Trailhead Ventures, disagreed, describing talk of dire consequences as cases of “Chicken Little”.
What all the witnesses did agree on was the point being put forward by Senator Chuck Schumer: that all partnerships in all industries should be given identical tax treatment.
“Our economy works best when we have the same tax rates across all industries”, said Stanford Law School professor Joseph Bankman.
Schumer, a New York Democrat, recently released a report with New York mayor Michael Bloomberg calling for a slew of policy shifts to keep New York from losing its status as the world's financial centre.
Iowa Senator Chuck Grassley, the Finance Committee's ranking Republican member, promptly alleged that Schumer was shielding his Wall Street constituents, who contribute handsomely to the Democratic Senatorial Campaign Committee (DSCC) led by Schumer, according to Bloomberg.
In June, private equity and hedge fund employees contributed $779,100 to the DSCC, and only $60,000 to the Republican Senate committee, the wire service found.
During the hearing, Schumer noted that the tax on carried interest for oil and gas partnerships, as well as those concerning “real estate, ethanol and anything else” ought to be the same as for hedge and private equity funds.
The comment was surely aimed at Grassley, who has co-authored a bill that would tax publicly traded partnerships like Blackstone and Fortress as corporations, while his home state stands to benefit from a proposed $69 million tax break on ethanol-related publicly traded partnerships, according to Bloomberg. US ethanol is made primarily with corn, a major crop in Iowa.
“I want to make sure that New York partnerships are not singled out when partnerships in other states use the exact same structures,” Schumer said.
Grassley has refuted claims that any industry is being singled out, and says discussions will continue as the committee has yet to reach conclusions.
“The carried interest issue is complicated and some might say headache-inducing, but this committee is responsible for getting the policy right,” he said during opening remarks. “So we need to take our aspirin and wade in.”