US House passes carried interest tax increase

The House bill will tax 75% of carried interest as ordinary income at a rate of 35%, and the balance as capital gains at 15%. The bill now goes before the Senate.

The US House of Representatives on Friday voted 215-204 to approve a major tax and jobs bill that increases taxes that general partners must pay on a large portion of their carried interest profits, raising the rate to 35 percent.

If passed by the Senate, GPs would still pay taxes at the capital gains rate on profits from capital they invest in their funds. But 75 percent of the remaining carried interest would be taxed as ordinary income at 35 percent. The remaining share will be treated as capital gains at 15 percent.

The tax increase would apply to profits earned after 1 January, 2011 and would phase in over three years.

Private equity and venture capital lobbyists are unsurprisingly disappointed.

“The House of Representatives today failed to recognise the serious economic consequences of their actions,” said Mark Heesen, president of the National Venture Capital Association, in a statement. “To those House members who consistently express interest in bringing more venture capital investment to their districts and states, I can tell you unequivocally that this is how not to attract investment.”

“This bill would make investment partnerships the only businesses in America whose owners would be ineligible for long-term capital gains treatment on the goodwill value they have created when they sell their stake in the business,” said Douglas Lowenstein, president of the Private Equity Council, in a statement.

The House has voted three times in three years to raise the tax only to see the legislature stall in the Senate.

If the Senate passes its version, the two will be reconciled in committee before being signed into law.

“We hope the Senate will consider carried interest options that still raise considerable revenue without discouraging important investment activity. They have the opportunity to support economic growth and innovation in their states, and throughout the country. Let's hope they seize it,” said Heesen.