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Lawmakers Consider Tax Hike on Private Equity

A group of lawmakers has reintroduced legislation that would repeal the carried interest tax exemption, increasing the burden on PE managers and their firms.

Lawmakers Consider Tax Hike on Private Equity

A group of lawmakers reintroduced a bill on Monday that would repeal the carried interest exemption, increasing the tax burden on private equity managers and other investors.

As part of a decades-old attempt to kill carried interest, Chairman of the House Ways and Means Oversight Committee Rep. Bill Pascrell, D-N.J., and a handful of House Democrats introduced the Carried Interest Fairness Act of 2021, a bill that would strike the namesake exemption from the U.S. tax code.

“The carried interest loophole has allowed private equity tycoons to pay lower tax rates than their secretaries,” Pascrell said in a statement.

The carried interest exemption allows the managers of private equity firms, hedge funds and other investors to pay lower capital gains rate on income—around 15% to 20%—rather than paying the 37% income tax rate.

The Congressional Budget Office has estimated that eliminating the exemption would return $14 billion to the federal government by 2028, according to 2018 figures.

However, a report published by the Congressional Research Service last July warned that taxing carried interest as ordinary income could be excessive and push managers into riskier investments.

Lawmakers have introduced similar carried interest proposals in the past, but none have succeeded. Rep. Sander Levin, D-Mich., now retired, began introducing a version of the current bill during every congressional session since 2007, but none ever became law.

But recent events, including the effort by an organized group of retail investors that disrupted trading in stocks like GameStop and others, have drawn increased public and regulatory scrutiny of the financial industry. Coupled with a Democratic-controlled House, Senate and White House, the possibility of stricter regulation like the Carried Interest Fairness Act is more likely than in previous years.

Carried interest became a point of discussion during the 2020 presidential election. Then-candidate Joe Biden’s tax plan would increase the tax rate on capital gains to 39.6% for people earning more than $1 million a year, according to The Wall Street Journal.

Biden has also proposed raising the highest individual income tax rate to 39.6% from 37%. Together, these changes would significantly increase the tax bill for high-earning private equity managers and firms.

It’s unclear when the bill will come up for a vote. But it will likely appear in the Ways and Means Committee before it’s voted on by a full session of the House.

Benjamin-Glick

Benjamin Glick is Middle Market Growth’s associate editor.