House panel OKs taxes on carried interest

Last week, as PE Week went to press, the Ways and Means Committee in the U.S. House of Representatives approved a plan to raise taxes on hedge fund managers, venture capitalists and private equity investors by $49.5 billion over the next decade.

The proposal would more than double the tax rate on the so-called carried interest, the compensation that VC and private equity firms, as well as real estate and oil and gas partnerships, receive for managing investments. The measure also would require hedge fund managers to pay tax on income they defer in offshore accounts. The carried interest tax proposal, which was known as the Blackstone Bill, came about in early summer following the $4 billion IPO of the Blackstone Group.

Buyout firms currently pay a 15% capital gains rate on carried interest. That would be increased to a rate as high as 37.9% under the proposal.

The Blackstone Bill seemed stalled in the late summer. But U.S Rep. Charles Rangel (D-NY), chairman of the House Ways and Means Committee, recently unveiled a sweeping, $1 trillion tax reform proposal that would raise taxes on private equity and hedge fund managers to help pay for temporary alternative minimum tax relief. The legislation, which the House Ways and Means Committee approved last week, must now be approved by the full U.S. House of Representatives, where it is opposed by many Republicans, and by the U.S. Senate, where the proposals to raise taxes on the general PE industry may face resistance from lawmakers of both parties.

Last week, both the Private Equity Council and the National Venture Capital Association issued statements against the tax legislation approved by the Ways and Means Committee.

Douglas Lowenstein, president of the Private Equity Council, said: “We are disappointed with the Committee’s action and we will continue to oppose legislation to change the tax treatment of carried interest. We remain hopeful that in the end this legislation will not be enacted into law.” —Alastair Goldfisher