Senate Again Eyes Carried Interest Tax: Sources

U.S. lawmakers desperate for revenue are looking anew at changing the tax treatment of profits earned by hedge fund and private equity managers, congressional sources said on April 13, a move that would hike their taxes considerably.

A proposal to change the tax treatment of fund managers’ profits known as “carried interest” last year passed the U.S. House of Representatives, which has approved such measures several times only to have them die in the U.S. Senate.

But as lawmakers run out of revenue to offset things such as a pending bill in the Senate to extend unemployment insurance, the idea is getting a second look by once skeptical senators, congressional aides said.

The Senate last month approved a $140 billion bill to extend jobless benefits through the end of the year and renew a series of popular tax breaks. That bill also closed several tax loopholes to bring down the costs, but the House then used some of those revenues in its health care overhaul, hence the need for more revenue.

President Barack Obama backs the change to carried interest and included it in his 2011 budget plan.

The bill passed by the House in December would raise nearly $25 billion over a decade.

Under current law, profits earned by investment fund managers at hedge fund and private equity firms are taxed as capital gains, a 15 percent tax rate, instead of as ordinary income, which would subject them to the highest 36 percent marginal income tax bracket.

The bill that passed the House would change treatment for income earned as a part of services provided for clients. Investment activity that uses the managers’ own funds would continue to be treated as capital gains for tax purposes.

Venture capital and real estate partnerships could also be affected.

In addition to skepticism from Senator Max Baucus, the Montana Democrat who controls the tax-writing Senate Finance Committee, Senator Charles Schumer, a Democrat from New York, has been seen as a roadblock to changing the tax treatment.

But on April 12, Schumer told reporters it was “on the table,” meaning it was under consideration.

Other revenue raisers lawmakers are weighing include changing the rules for tax on profits earned abroad by multinational companies, one lobbyist said.

(Reporting by Kim Dixon; Additional reporting by Andy Sullivan and Donna Smith)