Private Equity Tax Break Targeted By Congressional Democrats

calendar iconApril 28, 2021

U.S. House Ways and Means Committee member Bill Pascrell, D-N.J., and Sen. Tammy Baldwin, D-Wis., introduced companion bills in March 2019 that generally would end capital gain treatment for income from carried interests.

According to the release from Pascrell and Baldwin, the Carried Interest Fairness Act of 2019 would tax carried interest compensation at ordinary income tax rates and treat it as wage income subject to employment taxes. Capital gain treatment would continue to apply for individuals “who truly put money at risk, such as private-equity partners who invest their own money in their funds,” but “all income from managing a firm’s assets would be taxed at ordinary rates.”

Under current law, gains on qualified carried interests that have been held for at least three years generally are taxed as long-term capital gain. The three-year holding requirement was enacted in the 2017 tax cut legislation informally known as the Tax Cuts and Jobs Act (TCJA, P.L. 115-97). The pre-TCJA holding period was one year. Pascrell and Baldwin noted in their release that President Trump campaigned for office in part on a promise to end what he called the “carried interest loophole.”

Doing away with carried interest appeals to populist voters. President Donald Trump during the 2016 elections called hedge fund managers “paper pushers” who are “getting away with murder” because of the low tax rates they pay.

TCJA didn’t repeal the carried interest provision, but makes fund managers hold onto their investments for three years, instead of one, to qualify for the lower rates.

The Ways and Means Committee Democrat Sander Levin of Michigan introduced similar legislation in the 115th Congress. An official revenue estimate for the Pascrell-Baldwin, a December 2018 report from the Congressional Budget Office on options for reducing the deficit, projects that taxing carried interest income as ordinary would increase federal receipts by $14 billion between 2019 and 2028.

Co-sponsors of the House version of the bill include Ways and Means Committee Democrats Earl Blumenauer of Oregon, Brian Higgins of New York, Gwen Moore of Wisconsin, Don Beyer of Virginia, and Tom Suozzi of New York, as well as several non-tax writers who are members of the Congressional Progressive Caucus.

No Republicans in either chamber have as yet signed on as co-sponsors of the legislation.

It is currently unclear whether the legislation will be taken up in either tax writing committee or if it instead will serve primarily as a messaging vehicle for Democrats ahead of the 2020 presidential and congressional elections.