Ways and Means Tries to Tackle Carried-Interest Tax Break

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By Kaustuv Basu and Laura Davison

House Ways and Means Committee Republicans are delving into the tax treatment of carried interest, a thorny issue that has the potential to cause another divide among committee members.

Chairman Kevin Brady (R-Texas) met with committee Republicans April 6 to discuss the tax break that enables private equity managers to pay a capital gains tax rate as low as 23.8 percent on their share of profits. “While it is not a major tax provision, it has got a lot of attention through the years. So we want to make sure we understand the benefits of it, critiques of it and find a path forward,” Brady told Bloomberg BNA.

President Donald Trump criticized the provision numerous times on the campaign trail, but his administration hasn’t given a clear signal about what it wants to do in legislation. The House GOP tax reform plan suggests a 16.5 percent rate for long-term capital gains taxes. “Before we reach a decision, we clearly want to have a discussion with the Trump tax team,” Brady said.

Committee Republicans, however, remain divided on how to address the tax break as they work on a broader tax reform plan, a source familiar with the meeting said. They haven’t been able to unite around the controversial border adjustment tax plan, which would tax imports and exempt exports, and the debate over how to tax carried interest could face similar tension.

While some tax-writers support rolling back the carried interest tax break, others are leaning toward leaving the provision unchanged, a tax lobbyist said. “It’s a political fight, as it doesn’t raise much revenue and the tax policy arguments are mixed,” the lobbyist said. A former Senate staffer said the tax break might not survive if a tax reform bill was to move forward, but there might not be any willingness to eliminate it outside the context of tax reform.

The lobbyist and others spoke on condition of anonymity because the discussions are private.

A Wide Swath

President Barack Obama’s administration could have done more to attack carried interest tax treatment, but ultimately didn’t because these payment arrangements are used in a wide swath of industries, the lobbyist said. The previous administration could have leaned more on Congress to repeal the tax break or revoked IRS guidance that lawyers point to as the regulatory underpinnings permitting carried interest.

The IRS has proposed regulations (REG-115452-14) that would greatly restrict the use of management fee waivers, where fees are converted to carried interest, commonly used by investment fund managers. Agency officials have said they hope to release a final version this year, but the rules are currently under a regulatory freeze.

Carried interest is often associated with private equity firms, but the structure is used in many industries, including technology startups. “I want to make sure our members understand the entire provision and its reach and use throughout the economy. It covers a lot of industries—from real estate to venture capital, health care,” Brady said.

Ways and Means member Mike Kelly (R-Pa.) said lawmakers “need to hear from people who are in that business” to get a clearer picture of how to tax carried interest. The question is about equitable taxing, Kelly said.

Representatives of the private equity industry have been lobbying to preserve the tax break.

James Maloney, vice president of public affairs for the American Investment Council, a lobbying group for the private equity industry, said in an email that the council consistently reaches out to lawmakers.

“The overwhelming majority of House and Senate Republicans support the current tax treatment of carried interest, and every lawmaker we speak with is appreciative of the private-equity backed businesses in their respective districts,” Maloney said.

“There is no policy grounding for changes to the tax treatment of carried interest for private equity—it meets all the criterion of a long-term capital gain,” he said. “We will continue to inform lawmakers on both sides of the aisle, as well as the administration, of the need to maintain this longstanding tax treatment which encourages entrepreneurial risk taking.”

A measure introduced by former Ways and Means ranking member Sander M. Levin (D-Mich.) and by Sen. Tammy Baldwin (D-Wis.) in 2015 to tax carried interest as ordinary income would raise an extra $15.6 billion over 10 years, according to the Joint Committee on Taxation.

To contact the reporters on this story: Kaustuv Basu in Washington at kbasu@bna.com and Laura Davison in Washington at ldavison@bna.com

To contact the editor responsible for this story: Meg Shreve at mshreve@bna.com

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