US Senate drops carry proposal in tax bill

The effort to raise the carried interest tax rate died this week in the US Senate and is unlikely to be reconsidered during the next two years.

US Senator Max Baucus, a Democrat, dropped a provision in the contentious tax cut bill that would have more than doubled taxes on carried interest.

Under a loophole in the tax laws, private equity fund managers pay only the capital gains rate on their share of a fund's profit, rather than the ordinary income rate. While the capital gains rate is currently just 15 percent, ordinary income can be as high as 35 percent.

The Senate bill – which aims to help finance a number of tax cuts through tax increases in other areas – would have prevented general partners from paying taxes entirely at the capital gains rate on carried interest. Under certain rules, up to 75 percent of carry could have been treated as ordinary income beginning next year.

However, the effort ended this week.

The US Congress instead is focusing on a bill that will include an extension on middle class tax cuts and the renewal of dozens of business tax breaks without the new taxes on private equity and hedge fund managers to help offset them.

The US House of Representatives, since Democrats took control in 2006, has passed several bills closing the carried interest loophole, and the tax hikes have been pushed for by President Barack Obama. But the measures have always fallen short in the Senate.