Private equity lobby wins tax hike relief in Cut Inflation Act


Senate Democrats agreed on Sunday to shield private equity firms from a new $1 billion minimum corporate tax, bowing to pressure from Sen. Kyrsten Sinema (D-Arizona), who has insisted on bringing change to the sprawling sprawl of Democrats. climate, health and taxation.

The decision came as Democrats tried to hold their caucus together through nearly 19 hours of debate on the Cut Inflation Act of 2022, which the Senate approved 50-50 on Sunday with the help of a deciding vote from Vice President Harris.

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The package offers hundreds of billions of dollars in new spending, funded in part by new taxes, including a minimum corporate tax that would force companies with more than $1 billion in annual profits to pay a tax rate of at least 15%. As originally drafted, the provision would have required private equity firms to count the profits of their various holdings and pay tax if the total exceeded the $1 billion threshold.

Sinema, who for more than a year has blocked Democratic ambitions to raise taxes, raised objections on Saturday, according to two people with knowledge of the matter, who spoke on condition of anonymity to discuss private discussions . The senator argued that without changes to the bill, small and medium-sized businesses that are owned by private equity firms would be exposed to the tax, violating the Democratic pledge to only raise taxes on the biggest ones. companies. A spokeswoman for Sinema said several small businesses in Arizona, including a nursery, had raised concerns.

The senator’s objections came days after she persuaded Democrats to drop a different effort to raise taxes on private equity managers by removing the so-called “deferred interest loophole,” which allows investment managers to pay lower rates on parts of their earnings.

In a statement, Sinema’s office said its goal was to “target tax evasion, make the tax code more efficient, and support Arizona’s economic growth and competitiveness.”

“At a time of record inflation, rising interest rates and slowing economic growth, Senator Sinema knows that discouraging investment in Arizona businesses would hurt the economy’s ability to Arizona to create jobs, and she has ensured that the Inflation Reduction Act helps Arizona’s economy grow,” the statement said. said.

The last-minute changes mark a significant win for the private equity industry and estimated savings of $35 billion over the next decade. Private equity is an approximately $4 trillion industry in the United States, and as the sector has grown markedly over the past decade, it has deployed its considerable political force several times in Washington.

From the start, the unusual way private equity firms are structured posed a challenge to Democrats crafting the new minimum tax. Typically, large conglomerates are incorporated as “C corporations” under the tax code and pay corporate taxes. The new minimum tax would clearly apply to them. But private equity firms are legally incorporated as partnerships, which generally pay taxes on the individual returns of their owners. Senate Democrats say they crafted the legislation to ensure wealthy investment managers who own numerous C corporations and other business entities collectively worth more than $1 billion would be subject to the tax .

But the tax was never intended to hit the smaller subsidiaries that make up private equity portfolios, said Ashley Schapitl, spokeswoman for Senate Finance Committee Chairman Ron Wyden (D-Ore.), who has called the industry’s claims to this effect “nonsense”.

Independent analysts largely agreed with this interpretation of the provision. “The wording of the bill was intended to ensure that they were treated equally,” said Steve Wamhoff, a tax expert at the Institute on Taxation and Economic Policy, a left-leaning think tank. “The idea that billion-dollar private equity funds need to be protected to save small businesses is absolutely absurd.”

Steve Rosenthal, tax policy analyst at the Tax Policy Center, a nonpartisan think tank, said he believes “small businesses would not be affected” by the initial provision. “But that could be clarified,” he added.

Still, confusion over the provision sparked a belated scramble to remove it from the bill. In recent days, private equity advocates circulated a document to lawmakers claiming the tax could affect 18,000 companies that employ 12 million people, according to a copy obtained by The Washington Post. The document called the measure a “stealth new tax” that would put privately-owned small businesses at a “competitive disadvantage by subjecting them to the minimum tax on the books while their similarly sized competitors would not be taxed”. .

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Republicans took up the issue, and Sen. John Thune (RS.D.) worked with Sinema to craft an amendment to clarify that subsidiary profits would not have to be counted in determining whether a company is subject to the new minimum tax. On Sunday, the Senate voted 57 to 43 to pass the change. In addition to Sinema, six Democrats voted yes: Sinema’s fellow senator from Arizona, Mark Kelly; Catherine Cortez Masto and Jacky Rosen of Nevada; Jon Ossoff and Raphael G. Warnock of Georgia; and Maggie Hassan of New Hampshire.

The Senate then voted 51 to 50 to make up for lost revenue by restricting “intermediary” companies – which can include private equity firms – from claiming more than $250,000 in annual tax deductions.

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