Top congressional Democrats reached an agreement to increase taxes on managers of buyout firms and other investment funds as part of a jobs bill they plan to put to a vote tomorrow in the U.S. House, lawmakers said.
The plan is a scaled-back version of earlier proposals to raise taxes on fund managers, following pressure from some Senate Democrats and a real-estate executives’ trade group to soften the effect of the levy. It marks the fourth attempt by House Democrats to raise taxes on investment partnerships.
The legislation will also extend the Build America Bonds program, which reduces borrowing costs for state and local governments, and continue unemployment benefits, including subsidies to help people buy health insurance. And it includes rules changes aimed at stopping companies from exploiting tax treaties and offshore havens to lower their U.S. liability.
“By promoting jobs here in the U.S. and cracking down on loopholes that encourage companies to move overseas, we strengthen opportunities for American workers and businesses,” said House Ways and Means Committee Chairman Sander Levin, a Michigan Democrat. He outlined the proposal with Senate Finance Committee Chairman Max Baucus of Montana.
The plan would send $24 billion to states struggling to pay Medicaid bills, extend a group of business tax cuts, spend $1 billion to promote summer jobs for teenagers and postpone cuts in Medicare reimbursements to doctors for 18 months. Democrats had considered postponing the Medicare payment cuts for five years, though they dropped that idea amid complaints over the cost of the measure.
It would set aside $4 billion to settle lawsuits against the government filed by black farmers and American Indians. The total cost of the bill wasn’t immediately available.
Representative Dave Camp, the top Republican on the Ways and Means Committee, said the “unprecedented deficit spending” in last year’s economic-stimulus plan “didn’t create jobs and neither will this bill -- this is just more spending on the same failed policies.”
Democrats aim to send the bill to President Barack Obama by May 31, Memorial Day. An extension in unemployment benefits passed earlier this year expires at the beginning of June.
Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit, known as carried interest, is taxed at the lower capital-gains rate, currently 15 percent and slated to rise to 20 percent in 2011.
While the summary of the still-unreleased legislation didn’t say when the higher tax would go into effect, today’s compromise would mean that carried interest would be taxed at a 30 percent effective rate this year and 34.7 percent next year, said Steven Schneider, a tax lawyer at Goulston & Storrs in Washington. With self-employment taxes, the rate would be higher -- 32.2 percent in 2010 and 36.9 percent in 2011.
The summary said it would allow carried interest that reflects return on invested capital to continue to be taxed at capital gains rates.
“The bill would require investment fund managers to treat 75 percent of the remaining carried interest as ordinary income,” the summary said. The top ordinary income marginal tax rate is 35 percent and is scheduled to rise to 39.6 percent next year.
Three Times in House
The House has approved tax increases on carried interest paid to
private equity executives three times in recent years only to see the measures die in the Senate. The proposal has won broader support this year amid pressure to avoid adding to the deficit.
The proposed tax increase wouldn’t go as far as the one approved in December by the U.S. House when lawmakers voted to end fund managers’ ability to pay the lower capital-gains rate on the share of fund profits they are paid as compensation.
Four Senate Democrats and one Republican had pressed lawmakers to exempt venture-capital firms, and the Washington- based Real Estate Roundtable urged lawmakers to adopt a smaller tax increase than the U.S. House had previously approved.
Douglas Lowenstein, president of the Washington-based Private Equity Council, in a statement called the proposed tax increase “punitive” and said it “will hurt those companies that are most desperately in need of capital to sustain or create jobs and drive growth.”
Mark Heesen, president of the National Venture Capital Association, said in a statement the plan “will more than double the taxes that long-term investors pay when they build successful companies and create jobs” and that he hoped it would be revised. The group is based in Arlington, Virginia.
The Washington-based Private Equity Council didn’t immediately return a call and e-mail seeking comment on the plan.
Democrats also agreed to make it harder for lawyers, doctors and other professionals to sidestep
Social Security and Medicare taxes by organizing so-called S corporations. That change would generate $9.6 billion in revenue over the next decade.
The bill would spend $4 billion to extend the Build America Bonds program through 2012 while gradually reducing subsidies offered through the initiative to 30 percent from 35 percent.
The program was created as part of Obama’s economic- stimulus package to help drive down the cost of borrowing for public works by allowing state and local governments to market their securities to pension funds and foreign investors, expanding their reach beyond the traditional buyers looking for income exempt from state or federal taxes.
