Jeb Bush’s tax plan could sour his PE donors

In a September 8 op-ed in The Wall Street Journal, the former Florida governor said he plans to eliminate the tax deduction corporations take for paying down interest, long considered by many to be the life blood of the private equity industry. The deductibility of interest payments “encourages business models dependent on heavy debt,” Bush wrote.

Bush also plans to tax certain carried interest as regular income rather than as capital gains, which could effectively double the maximum tax rate on earnings generated by many fund managers.

Those elements of the tax plan surprised some Buyouts sources, since Bush once served as chairman of PE firm Britton Hill Holdings and counts some of the industry’s leaders among his backers. In February, Kohlberg Kravis Roberts & Co co-founder Henry Kravis hosted a $100,000-per-ticket fundraising event to support Bush. Likewise, Blackstone Group co-founder Stephen Schwarzman contributed $100,000 to Bush’s Right to Rise USA political action committee in May, as did Rh?ne Group founder Robert Agostinelli.

“When [Bush] started raising money early on, a lot of it was in New York, and a lot of it is in private equity,” said one Republican with close ties to PE donors. “A lot of the private equity community felt betrayed by Obama after 2008… Jeb is essentially setting himself up to be the Republican version of Obama in 2016.”

If Bush’s tax plan offends PE donors, those donors may begin directing their support to other candidates, such as Florida Senator Marco Rubio or Ohio Governor John Kasich, sources said.

“There’s an opportunity for the candidates … who are maintaining pro-growth principles in their plans/proposals to fundraise off Jeb’s move,” said another source. “The PE crowd firmly believes carry is appropriately taxed as a long-term capital gain, and since Jeb has conceded this point, support will continue to wane.”

The Private Equity Growth Capital Council (PEGCC) has already come out against certain elements of Bush’s plan, including his treatment of carried interest. 

“Increasing taxes on carried interest would discourage growth and investment and would make our tax code more complex and less fair,” spokesman James Maloney said in an email.

The Bush campaign did not respond to a request for comment. 

Concerned lobbyists

Lobbyists who work on behalf of the private equity industry and its interests expressed concern with elements of Bush’s proposed tax plan, which calls for a complete overhaul of the corporate tax code and the elimination of certain loopholes.

Association for Corporate Growth President and CEO Gary LaBranche said he liked certain components of the plan, namely the lowering of the corporate tax rate from 35 percent to 20 percent. But he said Bush’s specific targeting of carried interest’s tax treatment and interest payment deductions merit the industry’s concern.

“The reality is, the kinds of things he’s talking about, [like] interest deductibility, have been part of the way American business has been done for a century,” LaBranche said. “It’s not something that’s going to go easily into that good night.”

Private equity firms often finance leveraged buyouts through corporate debt issued by the companies they acquire. Thanks to the deductibility of interest payments, the newly acquired company can write off a significant portion of its tax obligation as it pays off the loans that financed the buyout.

Many believe this deduction to be crucial to private equity’s success. Bloomberg columnist William Cohan famously referred to the deduction as the “mother’s milk” of the leveraged buyout in 2012.

An organization dedicated to preserving the deduction, Businesses United For Interest and Loan Deductibility Coalition (BUILD), counts PEGCC, Real Estate Round Table and Small Business and Entrepreneurship Council among its members.

“As presidential candidates come out with proposals aimed at updating our tax code, the BUILD Coalition remains supportive of reform efforts that will foster long-term growth, create jobs, and strengthen businesses in every sector of the economy. Unfortunately, former Governor Jeb Bush’s new tax plan calls for eliminating interest deductibility, which runs counter to achieving these goals,” said BUILD spokeswoman Sabrina Siddiqui in a statement.

Action item: Read Jeb Bush’s tax plan: https://jeb2016.com/backgrounder-jeb-bushs-tax-reform-plan/