Buyout Firms, Hedge Funds Look to Senate, Bush to Beat Tax Rise

Date: Monday, November 12, 2007
Author: Alison Fitzgerald and Ryan J. Donmoyer, Bloomberg

Nov. 9 (Bloomberg) -- Private-equity firms and hedge funds may lose their first legislative skirmish when the U.S. House votes today on a proposal to raise their taxes. They will find friendlier territory ahead in the Senate and the White House.

The House is poised to adopt a $78.3 billion measure that would alleviate the impact of the alternative minimum tax this year. The measure offsets lost revenue by more than doubling the tax rate on so-called carried interest, the payment that executives at buyout and venture-capital firms, and real-estate and oil and gas partnerships, receive for managing investments.

The tax increase is less likely to pass the Senate, where Republicans have vowed to block it, and President George W. Bush has threatened a veto if it does get through.

``They lost round 1 in the House,'' said Sam Geduldig, a Republican lobbyist at Washington-based Clark Lytle & Geduldig, which represents financial-services companies such as Fidelity Investments. ``Round 2 with the Senate is evenly divided and it looks much more favorable with the president and the veto.''

The debate has exposed a rift among Democrats over whether to tap some of the party's wealthiest donors to help pay for tax relief for millions of middle-income families.

Private-equity firms and hedge funds have spent $6.1 million this year lobbying against the proposed tax increases. The Democratic Senatorial Campaign Committee, which is headed by New York Democrat Charles Schumer, received $695,500 from employees of those industries in September, the most since June, when the Senate Democrats' fund-raising arm pulled in $779,100. This compares with $110,500 in industry money for the Republican Senate fundraising committee in September, up from $60,000 in June, an analysis of Federal Election Commission records shows.

Favoring Democrats

The September haul comes on top of the $5.4 million that employees of hedge funds have given to congressional candidates and the political parties since Jan. 1, with 79 percent of the money going to Democrats, according to the Center for Responsive Politics, a Washington-based research group. In 2005-06, hedge funds gave $4.8 million, with 72 percent going to the Democrats.

In the House, Ways and Means Committee Chairman Charles Rangel of New York and Majority Leader Steny Hoyer of Maryland both said yesterday they are confident the measure will pass, even as some Democratic lawmakers, including Tim Mahoney of Florida and Jim Cooper of Tennessee, oppose it.

Senate Prospects

The measure's prospects are shakier in the Senate, where several Democrats on the Finance Committee, including Schumer, John Kerry of Massachusetts and Ken Salazar of Colorado, have indicated they may oppose the provision on carried interest.

Salazar, 52, exemplifies the Democrats' dilemma. The first- term lawmaker's second-biggest source of campaign contributions is from the anti-war group Moveon.org, which backs Rangel's bill and whose members have given Salazar $57,652 since 2003. His fourth-largest source of contributions is Vestar Capital Partners, a New York-based private-equity firm whose employees contributed $44,500 during that time.

The Senate Finance Committee hasn't yet said whether it will take up Rangel's bill or work on a measure of its own that would curb the minimum tax without raising other taxes, Salazar said yesterday. ``There are two alternatives,'' he said. ``Pay for it or put it in a funding package that doesn't have a pay- for. That decision, in my view, has not yet been made.''

Schumer's spokesman, Israel Klein, didn't respond to questions about whether the senator would support a tax increase on carried interest. In the past, Schumer has opposed proposals that he said singled out private-equity or hedge-fund executives, many of whom are his Wall Street constituents and contributors to his party's electoral war chest.

Kerry's Stance

Kerry, in a statement, said he applauds Rangel for finding new revenue to pay for the bill, though he declined to say if he would back a similar proposal in the Senate.

Senator Max Baucus of Montana, the Democratic chairman of the Finance Committee, said yesterday that while there is ``an argument for the carried-interest legislation,'' he doesn't think such a measure could garner the 60 votes necessary to overcome Republican opposition.

``I'm not going to waste my time if there are not 60 votes in the Senate,'' he said in an interview. He said there may be sufficient support for a minimum-tax measure that contains other revenue raisers.

Senate Budget Committee Chairman Kent Conrad of North Dakota, who also serves on the Finance Committee, said other members of the panel remain ``uncertain what the full implications are'' of raising taxes on fund managers.

``In the back of their minds, there's a worry we're going to do something here that has unintended effects,'' Conrad said, adding that he doesn't believe carried interest should be taxed at the current capital-gains rate of 15 percent. Rangel's measure would tax those profits at rates as high as 37.9 percent.

Conrad, who has pressed his Democratic colleagues to comply with budget rules that require any new spending or tax cuts to be offset by spending cuts or tax increases, said some lawmakers ``hope that we really don't have to eat the vegetables -- maybe we'll just eat dessert.''

To contact the reporter on this story: Alison Fitzgerald in Washington at afitzgerald2@bloomberg.net .