US Senator: carry tax hike won’t pass

Senator Debbie Stabenow’s comments could mean that GPs can breathe a sigh of relief, but the fate of carried interest is far from clear.

An increase in the tax rate on carried interest might be farther off than previously believed, as mixed messages come out of the powerful finance committee of the US Senate. 

Senator Debbie Stabenow, a Democratic member of the finance committee, told Crain’s Detroit Business on Tuesday a hike in the rate of taxation for carried interest would “not be part of any bill we pass”. 

A spokesman for Senate Finance Committee chairman Senator Max Baucus did not comment on Stabenow’s remarks, but said the committee chair feels carried interest should be addressed in the context of overall tax reform.

Carried interest is currently taxed at the capital gains rate of 15 percent. In December 2009, the US House of Representatives approved a measure that would treat carried interest as ordinary income, which would effectively raise the tax rate on carry to as high as 39.6 percent. The measure was part of the Tax Extenders Act of 2009, and is intended to finance a wide array of tax cuts.

The House has passed similar measures regarding carried interest twice before, and each time the measure has failed to get past the Senate. This time, however, the measure has the explicit support of President Barak Obama, whose 2010 budget included the line item “Tax carried interest as ordinary income”.   

Mark Heesen, president of the National Venture Capital Association (NVCA), said while he is “heartened” by Stabenow’s comments, the industry is by no means “safe” in 2010.

“It appears at this point unlikely that the Senate will pass their version of a tax extenders package with carried interest as the ‘pay for’,” Heesen said. “However, the work of the House Ways and Means Committee and the Senate Finance Committee is by no means over this early in 2010. The committees have some major decisions to make over the next several months on the estate tax, AMT relief, extension of the Bush tax cuts and possibly the initiation of discussions on fundamental tax reform. In any of these areas the carried interest matter could be debated.” 

Mary Kuusisto, a partner in Proskauer Rose’s tax group, called Stabenow’s comments “sensible”, but also noted any reprieve for GPs might be temporary.

“The Senator's statement may be an indication of the magnitude of that task alongside other very important legislative initiatives which may push any conclusions beyond this year,” she said. “That seems a practical reality to me.”