Buyout Firms to Avoid a Tax Hike
Reid Passes Word Senate Won't Act

By Jeffrey H. Birnbaum
Washington Post Staff Writer
Tuesday, October 9, 2007

Senate Majority Leader Harry M. Reid (D-Nev.) has told private-equity firms in recent weeks that a tax-hike proposal they have spent millions of dollars to defeat will not get through the Senate this year, according to executives and lobbyists.

Reid's assurance all but ends the year's highest-profile battle over a major tax increase. Democratic lawmakers, including some presidential candidates, had been pushing to more than double the tax rate on the massive earnings of private-equity managers, who the Democrats say have been chronically undertaxed.

In response, private-equity firms -- whose multibillion-dollar deals have created a class of superwealthy investors and taken some of America's large corporations private -- hired dozens of lobbyists, stepped up campaign contributions and lined up business allies to wage an unusually conspicuous lobbying blitz. Their argument was that higher taxes would run counter to accepted tax policy and slow economic growth.

Some lawmakers have touted the tax boost as a way to pay for such expensive measures as the repeal of the alternative minimum tax, which this year alone threatens to increase taxes on 23 million households. But lawmakers and lobbyists agree that if the tax is not raised this year, its chances are not strong in 2008, either; Congress tends to be leery of tax increases in election years.

In one meeting with industry representatives last month, Reid said the private-equity tax plan would not be considered in the Senate this year, according to a participant. Rather than citing the lobbying push, Reid implied that the reason had to do with the lack of time on the jammed Senate schedule.

Reid has made similar comments at meetings on Capitol Hill, according to participants who declined to be identified because the gatherings were private. Some lobbyists also said Reid aides had told them that the tax increase would not make it through the Senate this year.

Reid's spokesman, Jim Manley, reflected that doubt in an e-mailed response to a question yesterday: "Given the difficulty in getting any legislation through the Senate and the little time left this year for moving other issues important to the American public, it is unclear whether there is sufficient time to address the appropriate tax treatment of private equity firms."

The move to tax private-equity earnings began last spring after some of those companies, also known as buyout firms, started to sell themselves to the public. Their initial public offerings forced the firms to disclose how much their managers earn, and the amounts reached into the hundreds of millions of dollars.

Several prominent lawmakers expressed surprise to find that the managers' profits, known as carried interest, were taxed as capital gains, for which the rate is usually 15 percent. That is less than half the 35 percent top rate paid on regular income.

A leading legislative proposal, which originated in the House, would tax carried interest as regular income. By one back-of-the-envelope calculation, the change could raise an extra $6 billion a year in personal income taxes.

That proposal was authored by Rep. Sander M. Levin (D-Mich.) and sponsored by Rep. Charles B. Rangel (D-N.Y.), chairman of the House Ways and Means Committee. Rangel has said he wants to pass "the mother of all reforms" and that the carried-interest provision might be included. So far, though, the tax-writing panel has not scheduled a drafting session for the measure. And with little hope for Senate concurrence, a House-passed measure on the subject would have only symbolic value.

Senate leaders in general, including those on the Finance Committee, have been reluctant to advance the issue at all. "There's no carried interest proposal in the Finance Committee at this time," Carol Guthrie, spokeswoman for Chairman Max Baucus (D-Mont.), said via e-mail. "We're still reviewing the many issues surrounding that topic."

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

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."

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