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Business Groups Fight Private Equity Tax

By CHRISTOPHER S. RUGABER
The Associated Press
Thursday, September 6, 2007; 12:12 AM

WASHINGTON -- To help quash legislation that would raise taxes on private equity and hedge funds, representatives for big business are warning lawmakers that the effort could instead end up hurting the little guy.

It's a notion unions and consumer advocates scoff at, but opponents of legislation that will be discussed Thursday in House and Senate hearings say an increase in these taxes would harm minority entrepreneurs and venture capital funds that support start-up companies.

The Chamber of Commerce, for example, said in a study released Wednesday that the business structure known as a partnership that is commonly used by private equity and hedge funds is also critical to real estate, manufacturing, retail, and entertainment companies.

"The partnership is the cornerstone of the way we organize business and investment ventures in America," said John Rutledge, author of the study and chairman of Rutledge Capital LLC, an investment partnership.

Echoing the Chamber's sentiments, a group of minority-owned investment firms said that higher taxes on the cut of profits taken by investment managers would raise the cost of capital for the small companies they invest in.

But unions and nonprofit advocacy groups say partnerships take advantage of a tax loophole that allows wealthy investment managers to pay less in taxes than middle-income earners.

"The issue is one of fundamental tax fairness," more than 300 unions and public interest groups wrote in a letter to members of Congress in favor of the tax proposals. "Should wealthy fund managers pay a lower tax rate on income they receive for their work than the people who clean their offices and answer their phones?"

The letter was signed by the AFL-CIO, American Federation of Government Employees and Citizens for Tax Justice, among others.

The House Ways and Means Committee will debate a measure that would raise taxes on the cut of investment profits received by private equity and hedge fund managers, also known as carried interest, from 15 percent to as much as 35 percent. The House bill would also impact real estate, venture capital firms and other partnerships.

The Senate Finance Committee will hold its third hearing on carried interest the same day. A Senate bill that would subject publicly traded private equity funds to the corporate tax rate of 35 percent.

Private equity firms seek to buy troubled companies, make changes and cuts, and then sell them for huge gains, while hedge funds trade in everything from commodities to real estate to complex derivative investments.

The minority-owned investment funds opposed to higher taxes on carried interest calls itself the Access to Capital Coalition. The group includes Robert L. Johnson, founder of the BET cable television network and Earvin "Magic" Johnson, the former Los Angeles Lakers basketball star and chief executive of Johnson Capital Management.

The coalition has received funding from the Private Equity Council, a spokesman said, an industry lobbying group founded by the Blackstone Group LP, the Carlyle Group and other buyout firms.

The legislation's future is far from certain in the Senate, where leading Democrats from states with a high concentration of private equity, venture capital firms and hedge funds have all expressed reservations about the tax hikes.

Those include Sen. Christopher Dodd, a Connecticut Democrat who chairs the Senate Banking Committee, Sen. Charles Schumer, D-N.Y. and Sen. John Kerry, D-Mass.

Schumer has said that if Congress is going to raise taxes on financial partnerships it must be consistent and raise taxes on real estate, oil and gas and other partnerships, too. Such a broader tax hike could face greater difficulty in winning approval.

The issue of how private equity funds are taxed took off in June after Blackstone, one of the biggest private equity firms, went public, enriching its top executives. Chief Executive Stephen Schwarzman's stake in the buyout shop was valued at $7.7 billion after its initial public offering.

Private equity and hedge funds have fought the proposals, significantly increasing their lobbying efforts. Blackstone, for example, paid one public relations firm $3.7 million to lobby Congress and the government in the first half of this year, according to public disclosure forms. That's up from $240,000 in all of 2006.

© 2007 The Associated Press