Buyout Firms to Avoid a Tax Hike

Bush administration officials have also indicated that they would oppose a tax increase on carried interest.

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The attack on the carried-interest measure -- along with a smaller provision that involves the taxation of publicly traded partnerships -- has been expensive and highly coordinated.

It has generated business for more than 20 lobbying firms, including the capital's two largest, Patton Boggs and Akin Gump Strauss Hauer & Feld. Former senator John Breaux (D-La.) is on the case for Patton Boggs. Akin Gump's team includes Kenneth B. Mehlman, a former chairman of the Republican National Committee. Also on retainer to private-equity firms are former senator Don Nickles (R-Okla.) and many former congressional aides.

A single private-equity firm, Blackstone Group, paid Ogilvy Government Relations $3.74 million this year, which is one of the largest recorded fees to any lobbying firm during a six-month period. Ogilvy said half the payment covered unpaid bills from last year.

Private-equity firms have already distributed at least $5.5 million in lobbying fees, quadruple what they spent in all of 2006, according to Bloomberg News. Private-equity and hedge fund executives have been increasing their campaign donations to members of Congress, according to lobbyists for the industry.

Some of the most prominent executives in the industry have made the rounds of senior lawmakers in recent months. Among those seen on Capitol Hill were former commerce secretary Peter G. Peterson of Blackstone Group and David M. Rubenstein of Carlyle Group.

The financiers have benefited from cooperation with the real estate industry and the broad business groups like the U.S. Chamber of Commerce. Trade groups such as the Real Estate Roundtable have sent letters to lawmakers and testified before congressional committees against the tax increase because it would also impact the managing partners of their developers.

Some action is still possible on the tax front for private-equity firms this year. Rangel might still move a carried-interest provision through his committee as part of a large tax-increase measure. In addition, the relatively minor proposal to tax publicly traded partnerships as corporations has bipartisan support in both the Finance Committee and the Ways and Means Committee, and might make headway before year-end.

But the Senate remains an obstacle to the ultimate passage of the carried-interest provision. Manley noted that the Finance Committee held three hearings on the subject at which "a number of issues have been raised regarding how a change in the tax treatment of private equity firms might affect the broader economy." He added: "It is important that the Finance Committee adequately consider those issues to avoid unintended consequences."