Private Equity Firms Launch New Campaign

Wall Street’s titans took a big hit when the House approved a tax hike on hedge fund and private equity executives’ pay. Now they are pushing back in the Senate and on the campaign trail.

“This will definitely be a campaign issue,” said Bruce Josten, executive vice president of government affairs at the Chamber of Commerce. “How could it not be?”

Indeed, the constituencies are already mobilizing to turn an obscure tax issue into an election-year talking point.

Americans for Tax Reform sent notices to House members alerting them that a vote for the bill violates their pledge not to raise taxes and that it will consider running ads on the issue next year.

“We don’t have to do a whole lot of rhetorical gymnastics to accuse people of raising taxes, because that’s exactly what a vote for [the legislation] is,” said Ryan Ellis, director of tax policy for Americans for Tax Reform.

Meanwhile, labor unions and other progressive groups continue to slam the wealth and privilege that has come to define the private equity industry.

MoveOn.org circulated a petition last week urging its members to tell their senators to vote for the tax hike. The website featured an online calculator that allowed taxpayers to see how much they’d save if they paid private equity’s 15 percent rate. Someone with an income of $75,000, for example, would pay more than $4,000 less in taxes.

“Even if they kill it in the Senate, the issue will get raised again and again,” said Stephen Lerner, director of the Service Employees International Union’s Private Equity Project. “There is a rebellion around the notion that you can purchase privileged tax status.”

That message is already resonating on the presidential field, where all of the leading Democratic presidential candidates have called for taxing carried interest at regular income rates.

The fight has been brewing for months. The private equity industry has already spent $6.5 million on lobbying so far this year. The industry also started its own trade association — the Private Equity Council — and hired many of the top lobbying firms in town.

But last week, the House passed a bill increasing taxes on carried interest, a type of compensation received by executives at private equity firms, hedge funds, real estate partnerships and venture capital firms. The revenue will be used to prevent the alternative minimum tax — or AMT — from hitting millions of middle-class taxpayers this year.

Now private equity is aiming its hired guns at the Senate.

As in the House, the Senate debate will focus on whether to offset the $50 billion cost of AMT relief with tax increases. The hikes under consideration, however, will pose a whole new set of challenges for lobbyists on both sides.

“It’s an entirely different dynamic,” Josten said. “[The Senate Finance Committee] has a lot of pay-fors sitting on the shelf.”

Senate Republicans say that’s where they should be left, arguing that offsets are not necessary since the AMT has spiraled far beyond its original intent. Congress established the AMT in 1969 to tax 155 rich taxpayers who were evading taxes. If left unpatched, it will hit as many as 23 million Americans when they file their returns next spring.

Republicans need 60 votes to waive pay-go rules, a difficult goal. More achievable is a filibuster that could come if Senate Democrats push an AMT patch that includes corresponding tax hikes.

President Bush weighed in on the debate late last week, saying he would veto legislation that patched the AMT by increasing taxes on other taxpayers, putting pressure on Democrats to find other ways to cover the AMT repeal costs even as the April 1 tax deadline looms closer.

Senate Finance Committee Chairman Max Baucus (D-Mont.) said that tax hikes on private equity firms ad hedge funds are “on the table” but called them an “uphill climb.”

A carried-interest bill has yet to be introduced in the Senate. Sens. Charles Schumer (D-N.Y.), Chris Dodd (D-Conn.) and John F. Kerry (D-Mass.) have indicated that they have reservations about the House version of the legislation because of its breadth and focus on individual income.

Legislation already in the Senate, the so-called Blackstone bill, would increase taxes from 15 percent to 35 percent on publicly traded private equity firms — not the individual executives.

The tax hike will cause a “pissing contest” in the private equity industry, according to one industry lobbyist. The bill includes a five-year grandfather clause for firms — including Blackstone — that went or filed to go public before the legislation was introduced.

Industry lobbyists would like Congress to extend the grace period to all private equity firms that go public in the future. Blackstone, which says the proposal would increase its tax burden by $525 million, wants a 10-year transition period.

Democrats could resurrect other tax provisions from the $61 billion worth of revenue raisers already passed by the Senate Finance Committee.

Lobbyists mention implementing an economic substance law, which would crack down on companies using shelters solely to avoid taxes. The Senate Finance Committee estimates the law would raise roughly $10 billion. Another option is the repeal of the last-in, first-out method of accounting for inventory, a tax break popular with manufacturing companies.

Senate Majority Leader Harry Reid (D-Nev.) said last week that the Senate won’t take up the bill until after Thanksgiving, despite urging from the White House to pass a bill sooner so the Internal Revenue Service has time to modify its forms accordingly.
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