Carried Interest Loophole Back Up for Debate in Congress

The American Investment Council called a newly introduced bill on carried interest a “discriminatory tax increase.”

Sen. Tammy Baldwin (Andrew Harrer/Bloomberg)

Sen. Tammy Baldwin

(Andrew Harrer/Bloomberg)

Congress is trying once again to close the carried interest loophole, and one private equity advocacy group isn’t pleased.

New Jersey Representative Bill Pascrell, Jr. and Wisconsin Senator Tammy Baldwin, both Democrats, introduced this week the Carried Interest Fairness Act of 2019 in Congress, according to their March 13 statements on the legislation.

The bill, which has widespread Democratic support, would close the loophole that allows private equity investments to be taxed as capital gains rather than as ordinary income. The American Investment Council, though, called the bill a “direct assault on capital gains treatment” in a March 13 statement.

While the 2017 tax reforms made some changes to carried interest, or the cut of profits investment firms receive from their deals, it did not completely close the loophole. Instead, the reforms made it so that firms taxed at a capital gains rate must own assets for three years before benefiting from the loophole.

That affected hedge funds, but left private-equity firms largely unscathed because they tend to hold onto investments for longer periods of time.

“Congress addressed carried interest in the 2017 Tax Cuts and Jobs Act to protect long-term investment,” the AIC said in the statement. “The change required investors to invest in capital assets for more than three years before receiving long-term capital gains treatment.”

According to the AIC, U.S. private equity firms invested $3 trillion during the five years from 2012 to 2017. The lobby group referred to the Carried Interest Fairness Act of 2019 as a “discriminatory tax increase” on the industry.

The announcement of the bill on Pascrell’s website says the carried interest loophole was initially created for workers in speculative industries like oil and gas. These loopholes, according to the announcement, are now mostly used in the finance industry.

The proposed bill would return private equity firms and hedge funds with longer-term investments to the ordinary tax rate, which could be as high as 37 percent, according to the bill’s announcement.

“Certain wealthy taxpayers should not have their own parallel tax code of special breaks and deductions,” said Pascrell in a statement. “Our system has always been based on the principle that we ask more from those who have more, but today private-equity investors can pay a lower tax rate than their secretaries.”

[II Deep Dive: Tax Reform Bill Leaves Asset Managers Largely Unscathed]

In December, the Congressional Budget Office performed an independent analysis of how taxing carried interest as ordinary income would impact the federal revenues. There would be an additional $14 billion in revenue raised over ten years, the CBO found.

The bill’s next stop is the House Ways and Means Committee, where Pascrell is a senior member, according to his spokesperson.

“Pascrell is confident that his colleagues are as interested as he is to impose more fairness to the federal tax system, particularly by closing one of the most egregious tax loopholes in the code,” the spokesperson said via email Thursday.