Private equity's other close tax shave
Private equity lobbyists are very well compensated, but they still may be underpaid.
Driving the news: Beyond helping to salvage the carried interest tax break, as part of Inflation Reduction Act negotiations, private equity also beat back a costlier effort to raise taxes on portfolio companies.
- This would have been a 15% book minimum tax applied to any company within a PE fund that generated at least $1 billion in aggregate profits.
- In short, each portfolio company would be treated as part of a conglomerate. Even though they really aren't, as we've previously discussed when explaining why private equity funds aren't prone to systemic risk.
- Moreover, the rule would have created perverse incentives for portfolio construction — prompting PE to back less profitable companies early in fund cycles, to stay under the $1 billion threshold for as long as possible.
Backstory: The 15% private equity proposal first appeared in early drafts of the failed Build Back Better bill, but wasn't in the original IRA agreement between Sens. Chuck Schumer (D-N.Y.) and Joe Manchin (D-W.Va.).
- A source familiar with the process says that CBO mistakenly included the provision in its calculations of IRA's budgetary impact, saying it would generate around $35 billion in federal revenue over 10 years.
- This set off a chain reaction during the vote-a-rama, as there was no way either Manchin or Sen. Kyrsten Sinema (D-Ariz.) would support the clause's addition. Plus, GOP senate candidates like Arizona's Blake Masters made hay of it on social media, arguing (correctly) that a tax aimed at mega-corporations was being extended to small and mid-sized businesses.
- Sen. John Thune (R-S.D.) proposed a pay-for that would have limited SALT deductions, but that would have been a no-go for Democrats in high-tax states like New Jersey.
- Sen. Mark Warner (D-Va.), a onetime venture capitalist who had been in regular talks with Manchin ahead of IRA's introduction, revived a previously scrapped extension on deductibility caps on pas-through excess business losses. A source close to Warner says he worked out the savior amendment on the fly, without staff input.
The bottom line: The carried interest effort was poorly written, but at least well intentioned (based on my longstanding contention that carry is a fee for service). The 15% book minimum tax on PE portfolio companies, on the other hand, was dreadful from the jump and deserved its demise.