By Jeffrey H. Birnbaum
Washington Post Staff Writer
Tuesday, July 10, 2007;
D01
Soon after Rep. Eric Cantor called a meeting of lobbyists two weeks ago, his aides had to find a larger room. Instead of the couple dozen they had expected, 75 showed up.
Cantor, a Virginia Republican, convened the gathering to discuss how to defeat a set of fast-moving proposals that would vastly increase taxes on private-equity firms and hedge funds, the new money bags of Wall Street.
The high-stakes bills emerged in a rush last month as Blackstone Group, a major private-equity firm, prepared to go public and its principals stood to reap billion-dollar profits. Top congressional tax-writers moved to block the windfall and, in response, the funds mobilized some of Washington's most heavy-hitting lobbyists.
Dozens of lawyers, tax experts and public relations executives have been retained and together have begun to plot the defeat of the tax-increase measures. Their chief tactic: to persuade lawmakers that average citizens and run-of-the-mill businesses, and not just Wall Street fat cats, would be harmed by the legislation.
"This is a tax increase not only on those working on Wall Street, but also on all blue-jean-wearing Americans because of its effect on their retirement funds," Cantor said.
"Private equity has directly and indirectly had a positive impact on the lives of a lot of people, whether they know it or not," said Douglas Lowenstein, president of the Private Equity Council, a new trade association for the industry. "They shop in stores every day and eat in restaurants every day that might not otherwise be around except for private equity."
To make this case, lobbyists allied with Cantor and Lowenstein have been recruiting state pension-fund directors, charitable foundation managers, university endowment trustees, senior citizens' groups and others to speak out against the tax change.
In addition, businesses that are organized as partnerships like private-equity firms, especially oil-and-gas and real estate ventures, have joined in to say the legislation unfairly targets them and would harm their industries.
Ideologically driven anti-tax groups are also being brought in to argue that a tax increase like this one would depress the economy and restrain creation of jobs.
At least three coalitions have been formed to spread these views, including Cantor's Coalition for the Freedom of American Investors and Retirees. The U.S. Chamber of Commerce and the anti-tax Americans for Tax Reform, which is headed by conservative activist Grover G. Norquist, are also holding regular planning sessions.
Money appears to be no object. "I'm confident there are sufficient resources to do whatever we have to do," Lowenstein said. And he is certainly correct: Private-equity and hedge funds control more than $1 trillion in assets.
Rarely has an issue so quickly sparked such a lobbying frenzy. Then again, few proposals have threatened as many big-money players at a time when government was so hungry for new revenue.
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."
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