Congress reintroduces threat of tax hike on carry

The US Congress will again consider a tax hike on the private equity industry this year, as US House Ways and Means Committee chairman Charles Rangel has introduced another bill that would more than double the tax on carried interest.

As part of the Alternative Minimum Tax Relief Act of 2008, the Democratic congressman from New York has unveiled a plan that would treat carried interest as traditional personal income instead of capital gains, resulting in an estimated revenue windfall of $31 billion (€20 billion) over the next 10 years.

The proposed tax rise is linked to exempting millions of US citizens from the Alternative Minimum Tax (AMT), an antiquated levy designed in the 1960s to prevent high-income citizens from utilising various tax loopholes. The AMT rate was not pegged to inflation, and now threatens to snag middle-income families with a minimum tax rate of 26 percent.

Rangel and several budget-conscious Democrats hope to offset the $61.5 billion revenue loss from the exemption by linking it with several tax increases, including the proposed carry provision and repealing various tax breaks for oil and gas companies.

Rangel floated an identical legislative package last autumn, but the carry provision was ultimately abandoned amid intense lobbying by private equity and hedge fund groups. The defeat of last year’s carry tax was widely hailed within the private equity community as an example of the industry’s growing clout on Capitol Hill.

The bill will be considered by the House Ways and Means committee before making its way to a full House vote. If approved by the House, the bill will still have to be reconciled with whatever AMT-related legislation emerges from the Senate.

Last year, the House narrowly approved the AMT relief bill by a vote of 216 to 193 before the bill was stripped of the carry tax.

Several prominent institutional investors, including the California State Teachers’ Retirement System and the Oregon Public Employees Retirement System, have said that they would object to attempts by general partners to raise carry rates in response to a tax hike.

In related news, the Netherlands government is considering a similar bill that would raise its tax on carry from 1.2 percent to as much as 52 percent.