Dems may (again) target private equity firms to pay for corporate tax reform

April 4, 2011

Private equity firms could get roped into helping pay for U.S. tax reform. To help offset the budget cost of lower corporate rates, my industry sources tell me, Democrats in Congress are considering an attempt to alter 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, notes MF Global analyst Anne Mathias in Washington in a recent report, insight confirmed by my own reporting. 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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There are differnt types of carreid interest and not all are “essentially performance fees.” 47% of partnerships with carried interest are real estate and it is vurtually impossible for a general partner to create a real estate partnership without putting their own capital at risk. It is unfair to tax that type of carried interest as ordinary income.

Posted by lionprop | Report as abusive

In a time of economic recovery I just feel that it’s entrepreneurialism that’s going to help us out. But pinning corporate tax reforms on private equity firms is just going to discourage this and slow our attempts at achieving target growth levels.

Posted by JimmyChapman | Report as abusive