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Hedge-Fund Tax Rise Faces `Uphill Climb' in Senate, Baucus Says

Date: Wednesday, November 7, 2007
Author: Ryan J. Donmoyer and Alison Fitzgerald

Nov. 7 (Bloomberg) -- Tax increases on managers of hedge funds and buyout firms are ``on the table'' to help prevent a separate tax increase on 21 million middle-class households this year, Senate Finance Committee Chairman Max Baucus said.

``I'm not ruling anything out,'' Baucus, a Montana Democrat, said yesterday. ``It's on the table, but it's an uphill climb. Let's see where we are at the end of the day.''

Separately, Baucus said a narrower Senate measure that would force buyout firms that go public such as Blackstone Group LP and Fortress Investment Group LLC to pay taxes as corporations instead of as partnerships is likely to pass this year.

``That's very important policy, and I think it will be enacted,'' Baucus said. ``It needs to be done.''

The House is poised this week to adopt a $77 billion measure that would block the alternative minimum tax from imposing $50.6 billion in new levies this year. The measure would offset the lost revenue by more than doubling the tax rate on so-called carried interest, the payment executives at buyout and venture-capital firms, as well as real estate and oil and gas partnerships, receive for managing investments. It also requires hedge-fund managers to pay tax on income in offshore accounts.

Senate Majority Leader Harry Reid, a Nevada Democrat, said yesterday that the Senate wouldn't take up the measure until the week of Nov. 26 at the earliest. That gives lawmakers several more weeks for debate, although Treasury Secretary Henry Paulson has asked Congress for a swift resolution to give the Internal Revenue Service time to reprogram its computers to account for any changes in law.

Senate Delay

A delay in the minimum-tax legislation beyond mid-November would disrupt the 2008 filing season, slowing processing and refunds for as many as 50 million taxpayers, Paulson warned last month. Reid said yesterday that the Senate has more pressing matters, including several overdue spending bills and a vote on President George W. Bush's nominee for attorney general, Michael B. Mukasey.

About half of the House proposal's tax increases on fund managers would come from taxing carried interest as wages at rates as high as 37.9 percent instead of the 15 percent capital gains rate.

Baucus said he suspects that enough Democrats oppose the carried-interest tax increase to prevent its backers from obtaining the 60 Senate votes it would need to overcome procedural hurdles.

Republican Opposition

Senator Charles Grassley of Iowa, the ranking Republican on the Finance Committee, has said his party would attempt to block a minimum-tax measure that contains offsetting tax increases. The measure is also opposed by the Bush administration.

Still, Baucus said, senators are watching results of the House vote. ``I want to see if it passes the House; that's a good marker,'' Baucus said after meeting with House Ways and Means Committee Chairman Charles Rangel, a New York Democrat whose panel approved the legislation last week.

Senate Democrats including John Kerry of Massachusetts and Charles Schumer of New York raised concerns about the proposal in Finance Committee hearings on the issue this summer.

Rangel said after the meeting that he had outlined the House legislation to Baucus during the 45-minute session. ``I think they found it hard to digest,'' he said.

The minimum tax was created in 1969 as a backstop to the regular tax system after lawmakers learned that hundreds of millionaires were avoiding paying any tax by claiming excessive deductions and exemptions. The tax was never indexed for inflation and now hits households with incomes between $200,000 and $500,000 and can affect families with incomes as low as $50,000.

About 4 million households currently pay the tax, and Rangel said that number could rise to 23 million this year if the fix isn't enacted.

To contact the reporters on this story: Alison Fitzgerald at afitzgerald2@bloomberg.net ; Ryan J. Donmoyer at rdonmoyer@bloomberg.net