Buyout barons could help pay for U.S. tax reform

April 4, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By James Pethokoukis

Private equity firms could get roped into helping pay for U.S. tax reform. To help offset the budget cost of lower corporate rates, Congress is considering altering the treatment of publicly traded partnerships. Such a move could bring in several billions of dollars a year from Blackstone, Fortress and Apollo, the latest buyout shop to move to the New York Stock Exchange. A similar legislative effort in 2007 failed, but this one might have legs.

The attempt four years ago suffered from the perception it was punitively targeting one firm. It landed the sobriquet “The Blackstone Bill,” and not without cause. It was introduced just as Steve Schwarzman’s firm was preparing to go public. The surprise bill would have slammed the qualifying partnerships at the time, Blackstone and Fortress, with a 35 percent corporate tax on profits before distributions to shareholders.

Fortress would have had a five-year grace period, but Blackstone probably would have been tagged immediately. No wonder the firm amended its IPO prospectus to warn that the bill could cause a “material increase in our tax liability and … a reduction in the value of our common units.”

The proposal stalled in committee, however. And later legislation that would have subjected carried interest, essentially performance fees, to the high marginal tax rate on ordinary income instead of the lower capital gains rate met a similar fate. Yet another attempt failed during last year’s financial reform debate.

But the push for broad corporate tax reform could provide an opportunity for congressional Democrats to revive the original approach. There’s support on both sides of the aisle for reducing corporate tax rates this year, while also closing loopholes and eliminating tax breaks to make up potentially lost revenue. Republicans might accept the tradeoff to secure a lower overall rate — which might also lessen the sting for the buyout shops.

The industry would prefer the status quo, of course. And for now, the firms are betting reform is still at least a couple of years off. But if that schedule should accelerate — and it well could — the focus on private equity pocketbooks will sharpen.

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