Largely, it appears, in reaction to news stories of the excessesof some Wall Street "Masters of the Universe", two proposals wereintroduced in Congress this summer. First is a bill introduced bythe leaders of the Senate Finance Committee that would tax ascorporations those partnerships that elect to become publiclytraded and that derive income from investment advisory services.This bill, S. 1624, is limited in scope and will likely have verylittle direct impact on the real estate industry.

Of significantly more concern to real estate, however, is a billintroduced in the House, H.R. 2834, by Congressman Sander Levin(D-MI) and supported by Chairman Charles Rangel (D-NY) of the HouseWays and Means Committee and Chairman Barney Frank (D-MA) of theHouse Financial Services Committee. This bill would result in thetaxation of the "carried interest" or "promote" received by ageneral partner in a partnership as ordinary income. This couldhave a significant impact on many real estate partnerships byraising the taxes on this income from the current 15% capital gaintax rate to ordinary income tax rates, which are currently as highas 35%.

Any speculation about what changes Congress might make to thetaxation of carried interest has to include a look at the budgetaryreality that Congress faces. Current Congressional rules, known as"pay-as-you-go" or "Paygo" rules, require that changes to the taxcode not increase the federal deficit. The practical effect of thisis that for every tax cut that Congress wants to enact, it needs toenact an equal tax increase or spending cut resulting in a neteffect that is deficit neutral. The existence of these Paygo rulesmeans that Congressional tax writers end up spending a lot of timesearching for "revenue raisers" or tax increases to offset the taxcuts that they want to enact.