Lobbyists Try to Quell Frenzy Over Private-Equity Fund Tax

Lawmakers, especially Democrats, are frantically hunting for billions of dollars to pay for massive expenditures they want to make -- particularly the planned expansion of a health insurance program for children known as SCHIP, and the easing of a scheduled tax increase on upper-middle income Americans via the alternative minimum tax.

At least one of the private-equity bills would go a long way toward satisfying this need for major new revenue. That legislation, backed by several senior House Democrats, including two committee chairmen, would tax fund managers' profits at the 35 percent corporate rate rather than the 15 percent capital gains rate they now pay.

A less-lucrative bill in the Senate, proposed by its two top tax writers, would also more than double the tax burden on fund managers, but only for those who take their firms public like Blackstone.

Even presidential candidates have entered the fray. Former senator John Edwards, who has worked for a hedge fund, has advocated increasing taxes on private-equity and hedge fund managers, saying that the change would make the tax code more equitable without damaging capital markets.

Despite such big-name backing, neither piece of legislation is a sure winner. The Bush administration has strongly criticized both bills, and Senate tax-writers have reacted coolly to the House Democrats' plan. Only the Senate bill, authored by Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa), appears to be on a fast track and could be voted on in committee as early as this month. But the House and full Senate have yet to set a timetable. Meanwhile, hearings are scheduled in the next few weeks to air the bills' implications.

In preparation, an extraordinary number of high-priced lobbyists, hired by private-equity firms, have been blanketing Capitol Hill. The Private Equity Council has enlisted four of the capital's most widely connected lobbying firms: Akin Gump Strauss Hauer & Feld; Capitol Tax Partners; Brownstein Hyatt Farber Schreck; and Johnson, Madigan, Peck, Boland & Stewart.

Blackstone and Carlyle Group of the District have retained Ogilvy Government Relations, which is led by Managing Director Wayne L. Berman, a major Republican fundraiser. Fortress Financial Group, which once employed Edwards and was the first hedge fund to go public, has brought on a tax specialist, Washington Council Ernst & Young.

Kohlberg Kravis Roberts, a private-equity firm planning to go public, has added the law firm powerhouse Covington & Burling as its lobbyist. Kenneth B. Mehlman, the former chairman of the Republican National Committee now with Akin Gump, is KKR's strategist.

But the industry is not relying only on insider connections. It is also asking other industries to reach outside the Beltway for support. The Real Estate Roundtable has been urging its members, which include real estate agents, real estate financiers and real estate developers, to write letters to their senators that say the measures' "startling 133 percent tax increase [would] deal a blow to real estate entrepreneurship."

"This does not seem like a terribly wise time to be tampering with laws that could inadvertently lower property values across a wide segment of commercial real estate," said Jeffrey D. DeBoer, president of the Real Estate Roundtable.

Norquist's group is eager to gin up contacts from average voters. It plans to ask the 60,000 people it e-mails regularly to write their congressional representatives. It also intends to warn the 800 talk-radio stations it corresponds with about the tax plan.

The biggest obstacle to the proposal, however, is likely to come from President Bush, who opposes tax increases. At a recent Wall Street Journal forum, Treasury Secretary Henry M. Paulson Jr. said he was concerned that the bills might have unintended consequences for all sorts of partnerships and not just money funds.

"There are many partnerships -- real estate, energy, construction -- and they have real advantages; it's a great structure to promote risk-taking entrepreneurial spirit," he said. "And I do think we need to be careful in dealing with something like this piecemeal."