Tax lobbyist: ‘This thing has legs’

As two separate US congressional committees disclose plans to hold private equity tax hearings, a veteran Washington lobbyist said he detects unusually strong momentum from lawmakers toward private equity-inspired legislation.

Private equity is to be examined by the Ways and Means Committee, the US House of Representatives’ most influential committee in terms of revenue- and tax-related policy and legislation.

In a related development, carried interest – and whether it should be taxed as capital gains at 15 percent or as income at 35 percent – will also be the subject of hearings this summer in the Senate Finance Committee, which is chaired by Senator Max Baucus, a Democrat from Montana.

The proliferation of public statements from US lawmakers on the topic of how private equity is taxed has led one veteran Washington tax lobbyist to predict that some form of legislation is on the horizon. “This thing has legs,” said the lobbyist.

The lobbyist, who specialises in tax issues, noted that the vast majority of proposed legislation never becomes law, and stressed that the ability of financial institutions to fight for their interests on Capitol Hill should not be underestimated. But he said that Congress’ dire need to raise tax revenue, together with private equity’s increased profile, had created a notable momentum among lawmakers.

Ways and Means Committee chairman Charles Rangel said today in a statement: “We believe it is imperative that Ways and Means, as the committee of primary jurisdiction over tax legislation, conduct a hearing on the important issues surrounding private equity, carried interest and publicly traded partnerships.”

A bill has already been introduced by the Senate Finance Committee’s ranking members that would cause publicly traded partnerships to be taxed as corporations, meaning they would be subject to two levels of taxes as opposed to one. The Grassley-Baucus Bill would apply only to partnerships that receive income from investment advisor and related asset manager services, and would not apply for five years to firms that have been trading (or have applied to trade) on or before the bill’s introduction on 14 June. Baucus has since said he is considering changing the bill to shorten the transition period.

Representative Peter Welch, a Democrat from Vermont, yesterday introduced a similar bill sans the transitional period.

“There is absolutely no reason some of the richest partnerships in the world should be able to rip off American taxpayers because of a gaping tax loophole,” Welch said in a statement.

Rangel said today: “While the Senate has outlined their own unique approach on these issues, the House is not bound to consider identical legislation – especially as it pertains to transition rules. After speaking with representatives from the financial services and investment banking industries, it is clear to me that the failure to act and clarify the law is much more serious than the question of an effective date in legislation.”

The Ways and Means hearings will take place in July, though the date has yet to be set.

Hearings on carried interest tax to be held by the Senate Finance Committee do not yet have a date.

“The nature of investment vehicles is changing right before our eyes, and the tax code must keep up with the times,” Baucus said in a statement earlier this month.

David Snow contributed to this report.