WASHINGTON, DC-Carried interest–or rather, the way that carried interest is taxed–is back under Washington’s spotlight. President Obama told the nation on Sunday night, before the Super Bowl, that his focus will be on trimming government waste, reforming expensive healthcare programs—and closing lucrative loopholes. He singled out carried interest as one example.
That announcement was followed up on Monday by Rep. Sandy Levin (D-Mich.), who told Bloomberg Television that the tax preference was unfair. “They’re managing other people’s money, so why should they get a capital gains rate when people who also risk their time pay ordinary income tax if it reaps benefits,” Levin said, (via The Hill). “That’s the basic issue. It’s I think, as the president made clear, inescapable.”
Carried interest has been on the chopping block before in Congress—changes to its tax characterization, though, have always been defeated. Certainly, this latest attempt to change carried interest will be a long slog. However, Capitol Hill observers have speculated it could be lost in the horse-trading to end the sequestration or the expected class over funding the government in March.
The private equity and real estate industries will, as they have in past attempts to change carried interest’s tax characterization, make their case for this tax break. Steve Judge, president and chief executive of Private Equity Growth Capital Council, pointed out to reporters the 58% increase in taxes paid on capital gains that was part of the fiscal cliff resolution.
The audience at a recent Real Estate Roundtable conference also made an excellent case.
Carried interest was on the agenda at the Roundtable’s 2013 State of the Industry Meeting held last Wednesday. One of the speakers, Sen. Charles Schumer (D-NY), a member of the tax-writing Senate Finance Committee, discussed the likelihood of renewed efforts to curtail tax deductions and to close tax “loopholes” — including the possibility of fixes to short-term budget challenges by permanently re-characterizing partnership carried interest as ordinary income.
Owner-developers in the Roundtable audience made their case for keeping carried interest as is by noting that it is an investment model that compensates the general partner in a real estate business venture for substantial risks taken during development and sale of the project. “Since many commercial real estate ventures are organized as S corporations, partnerships, limited liability companies (LLCs), or sole proprietorships, their income is subject to the tax rates faced by their individual owners — rates already increased under the New Year’s Day fiscal cliff agreement,” the Roundtable said in its description of the proceedings.