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US Union Attacks Private Equity Taxation

by Leroy Baker,, New York

16 August 2007

In another attack on the private equity industry, the US Service Employees International Union (SEIU) has accused private equity executives of hurting working Americans, risking pension returns, and cutting into federal and state revenues, while reaping hundred million-dollar payoffs and avoiding paying their fair share of taxes.

SEIU President Andy Stern argued in a statement issued by the union that buyout firms are "cutting the heart out of the American economy" with the way they conduct business, and at the same time increasing the tax burden of working Americans by using sophisticated tax avoidance schemes.

While the main focus of the private equity tax debate is on whether fund partners should pay income tax rather than capital gains tax on carried interest, the SEIU says that the taxation of carried profits is "just the tip of the iceberg of the buyout industry’s larger and more sophisticated tax avoidance schemes". The union suggested that not only do buyout firms get away with not paying corporate tax, but portfolio companies pay little or no corporate tax, because of the tax deductibility of interest payments that are a result of leveraged buyouts.

The SEIU also argued that buyout firms and their portfolio companies benefit from billions in government subsidies, "but avoid paying taxes and lobby to protect their profits at all costs". By way of example, it highlighted the Carlyle Group's purchase of nursing home giant HCR-ManorCare for $6.3 billion, stating that it expects the Group to own the company for approximately five years. According to the union, ManorCare will receive an estimated $14 billion in state and federal tax-funded payments while it is owned by Carlyle, and CEO Paul Ormond will make as much as $186 million as a result of the deal. The SEIU said that, moreover, ManorCare will pay no corporate taxes while it is owned by Carlyle, cutting federal, state and local tax revenue by more than $600 million over five years, based on an analysis using "conservative assumptions".

The SEIU is the main union involved in ManorCare's nursing home facilities, and there is a history of strife between the two organizations.

The SEIU has formed a committee of public sector union leaders and member pension fund trustees to work with Governors and other officials at the state level, in order to investigate the impact of buyouts on state tax revenues, state services, and other issues. The union is also launching an investigation into the federal contracts held by Carlyle Group portfolio companies, and the impact of those Carlyle buyouts on federal tax revenues.

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