U.S. bill taxing fund managers edges forward

Managers of private equity and other investment funds would see their taxes more than double under a multibillion-dollar jobs package being readied by Democrats.

The bill, which Democrats say would close tax loopholes given to the fund managers, would also tighten tax rules for multinational companies and extend unemployment and other benefits for millions of Americans.

The legislation is a joint effort of the Senate and House of Representatives tax-writing panels and marks the first time a tax increase on fund managers’ profits has found support from Senate Finance Committee Chairman Max Baucus, a Democrat. Its fate is not certain though, due to its size and controversial provisions, including the fund-manager tax.

The bill, released in summary form on Thursday, still must pass both chambers. In the 100-member Senate, 60 votes are frequently needed to overcome procedural hurdles.

The tax on so-called carried interest would hit the typical 20% share of profits that fund managers reap from managing investors’ money.

Many fund managers, who can earn millions of dollars in a good year, pay just a 15% long-term capital gains tax rate on their share of profits.

The bill proposes to treat 75% of those profits as ordinary income, a 35% tax rate for the highest earners.

Democrats hope the jobs provisions in the bill, including billions in tax breaks for business, will chip away at the near 10% unemployment rate that could cost them their jobs in the November mid-term elections.

“Our economy is just beginning to show signs of recovery, yet too many hard-working Americans lost their jobs in this recession and we can’t leave them behind,” Baucus said.

At the beginning of the year, congressional Democrats said job creation would be their top legislative priority, but so far, they have managed to send only one modest bill to the White House for President Barack Obama to sign into law. With the government projected to post a trillion-dollar-plus budget deficit, many moderate Democrats have balked at additional spending.

The tax change would hit profits that managers of private equity, venture capital, real estate and hedge funds get for managing investors’ money.

It will likely hurt hedge-fund managers the least since many are already paying ordinary income rates because of their fast investment turnover, according to lawyers.

Dozens of special interests would benefit from the bill, from doctors working with Medicare patients to businesses waiting for renewal of a set of politically popular tax breaks that expired last year, including a 20% research and experimentation credit and renewal of a biodiesel tax credit.

“This is a classic piece of legislation where there is something for everybody,” said Clint Stretch, a former counsel on the joint tax panel in Congress and now at Deloitte. “There is a certain realism setting in that they are going to have to pay for extending expiring provisions, now or later.”

Democrats did not give a final cost to the bill, but Republicans said it added to $150 billion in unfunded spending and lashed out at its cost.

“This is just more spending on the same failed policies and no net tax relief,” said Dave Camp, the ranking Republican on the tax-writing panel in the House.

The bill also includes a provision that would boost the amount oil companies pay into a trust fund that helps clean up oil spills and extends the popular Build America Bond program for two years.

House Speaker Nancy Pelosi said the bill would likely have to wait until next week to be taken up by the House, to give members time to read it.

Pelosi will rarely bring a bill to the floor without expecting to have the votes to pass it. Democrats hope the Senate can take it up later next week, to prevent unemployment and health benefits from running out on millions of Americans as scheduled under current law by the end of May.

“This is a bill about creating jobs, preventing outsourcing of jobs overseas, closing loopholes of corporations … and meeting the needs of those who have lost jobs through no fault of their own,” Pelosi said. “Yes, I think we have the votes.”

Venture capital funds had sought an exemption, enlisting five senators to write Baucus on their behalf. But there do not appear to be any “carve-outs” for certain industries, according to the summary.

“While this provision is movement away from a pure change to ordinary income, evidencing a House recognition that this type of long-term investment is critical to U.S. economic growth, it by no means creates enough of a differential to continue to encourage long-term investment in America’s startup companies,” said Mark Heesen, president of the National Venture Capital Association.

One private-equity executive who declined to be named said the industry understands that a tax increase is likely, but the debate is really over whether carried interest should be reclassified as ordinary income as opposed to capital gains.

“The fight isn’t on the rate — everyone knows that’s going up,” the executive said.

The provision has passed the House three times, but has yet to gain traction in the Senate. The issue has gained momentum in recent months, perhaps aided by anger at Wall Street pay in the aftermath of the financial crisis.

For a summary of the bill, go to: finance.senate.gov/

Additional reporting by Megan Davies, Reuters