Carried Interest Tax Hike Faces Uphill Battle In Senate

by Mike Godfrey, Tax-News.com, Washington

08 November 2007

While proposals to increase the amount of tax paid on the carried interest earned by private equity and hedge fund partnerships in the US are on the table, they are unlikely to pass Congress any time soon, Senator Max Baucus has indicated.

Legislation to change the treatment of carried interest so that it is taxed as ordinary income at rates of up to 35%, and not investment income at the 15% capital gains tax rate, has already been introduced in the House of Representatives by the Democrat Ways and Means Committee Chairman Charles Rangel, as part of his 2007 tax reform package.

However, Baucus, the Senate's chief tax writer, argues that there is insufficient support for the proposal in the Senate for it to pass, even if it is part of legislation repealing the unpopular alternative minimum tax.

"I'm not ruling anything out," he announced, according to Bloomberg, continuing: "It's on the table, but it's an uphill climb."

The proposal to increase the rate of tax paid on carried interest would be one of the many offset measures to help pay for a repeal of the AMT for the majority of taxpayers. Baucus is broadly in favor of reclassifying carried interest as ordinary income, but the proposal is being fiercely opposed by the venture capital lobby, which argues that the move would stifle investment in start-up companies and new technologies. Moreover, the administration has voiced criticism of the proposal and other narrowly-targeted revenue-raisers, while President Bush has threatened to veto any increase in tax on carried interest.

But, according to Baucus, another proposed offset that would limit the ability of hedge fund managers to defer tax by holding income offshore, stands a much better chance of passing Congress.

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