Schumer expected to push for PE taxation
By Nicholas Rummell Financial Week
August 15, 2007
The movement to tax private equity and hedge funds just gained a powerful ally, as Sen. Charles Schumer (D-N.Y.) is expected to propose legislation raising the tax on carried interest on investment partnerships.
Private equity groups had counted on Mr. Schumer to oppose increasing taxes, and have frequently cited him as evidence of a schism among Democrats on the bill. Mr. Schumer is known for his close ties to Wall Street and hedge funds in particular. But by proposing such a bill, the New York senator may be trying to take the focus off private equity firms and apply it specifically to other industries, such as oil and real estate.
Mr. Schumer’s bill would be a lot like legislation proposed in the House, which would raise the tax on private equity carried interest from 15% to as much as 35%. The bill, proposed by Rep. Sander Levin (D-Mich.) and supported by several key Democrats in the House, including Charles Rangel (D-N.Y.), would impact investment management services to public partnerships. That legislation does not specifically mention oil and gas or real estate, but many have interpreted the legislation as applying to those industries.
On the other hand, Mr. Schumer is trying to explicitly apply the increased tax to those other partnerships, not just private equity. In a recent Senate hearing, Mr. Schumer said he wants to ensure that Wall Street firms are not singled out by tax bills. “If we’re going to change how we tax financial partnerships, we should treat oil and gas and venture capital and real estate and everything else the same,” he said at the July hearing.
Robert Stewart, a spokesman for the Private Equity Council, said that his organization “believes the current tax treatment of carried interest is the appropriate one,” and declined to comment specifically on Mr. Schumer’s planned legislation.
Still, other key Democrats are leery about boosting private equity taxes. Sen. Harry Reid (D-Nev.) has said he will postpone legislative action on PE taxes until next year. Mr. Reid has also been cited as an unlikely ally in taxing PE firms because of the recent interest in Hilton and other hotels and casinos by private equity firms. Some “blue dog” Democrats in the House, including Joseph Crowley (D-N.Y.), have met with private equity lobbyists and have expressed concerns about the bill.
Private equity is a hot target for lawmakers looking to raise revenue. A bill proposed in June by Sen. Max Baucus (D-Mont.) would eliminate the tax exemption on publicly traded partnerships that receive investment advisory fees. Mr. Baucus’ finance committee, which handles all tax issues in the Senate, is also looking at a proposal to increase taxes on loans made by hedge funds.
Such loans are often transferred to offshore funds after a waiting period, and are therefore free from taxation. A committee staffer said no specific legislation has been drafted yet.
The Ways and Means and Finance committees plan to hold additional hearings on private equity taxation after Congress reconvenes next month. Also pending is a congressional report on how much revenue would be generated by the House carried-interest legislation.