Senate Democrats agreed Sunday to protect firms owned by the private equity industry from a new minimum tax on billion-dollar corporations, bowing to pressure from Sen. Kyrsten Sinema (D-Ariz.), who insisted on making the change to the Democrats’ sprawling climate, health-care and tax package.
The package proposes hundreds of billions of dollars in fresh spending, financed in part through new taxes, including a corporate minimum tax that would require firms with more than $1 billion in annual profits to pay a tax rate of at least 15 percent. As originally written, the provision would have required private equity firms to tally profits from their various holdings and pay the tax if the total exceeded the $1 billion threshold.
Sinema, who for over a year has blocked Democratic ambitions to raise taxes, raised objections on Saturday, according to two people with knowledge of the matter, who spoke on the condition of anonymity to discuss private talks. The senator argued that, without changes to the bill, small and medium-sized businesses that happen to be owned by private equity firms would be exposed to the tax, violating a Democratic pledge to hike taxes only on the largest firms. A Sinema spokeswoman said several Arizona small businesses, including a plant nursery, had raised concerns.
The senator’s objections came days after she persuaded Democrats to abandon a different effort to raise taxes on private equity managers by closing the so-called “carried interest loophole,” which permits investment managers to pay lower rates on certain portions of their income.
In a statement, Sinema’s office said her goal is to “target tax avoidance, make the tax code more efficient, and support Arizona’s economic growth and competitiveness.”
“At a time of record inflation, rising interest rates, and slowing economic growth, Senator Sinema knows that disincentivizing investments in Arizona businesses would hurt Arizona’s economy’s ability to create jobs, and she ensured the Inflation Reduction Act helps Arizona’s economy grow,” the statement said.
The last-minute changes mark a significant victory for the private equity industry and an estimated savings of $35 billion over the next decade. Private equity represents a roughly $4 trillion industry in the United States, and as the sector has grown markedly over the past decade, it has flexed its considerable political muscle repeatedly in Washington.
From the start, the unusual way private equity businesses are structured posed a challenge for Democrats crafting the new minimum tax. Typically, large conglomerates are formed as “C corporations” under the tax code and pay corporate taxes. The new minimum tax would clearly apply to them. But private equity firms are legally formed as partnerships, which typically pay taxes on the individual returns of their owners. Senate Democrats say they crafted the legislation to ensure that wealthy investment managers who own numerous C corporations and other business entities collectively worth more than $1 billion would be subject to the tax.
But the tax was never intended to hit the smaller subsidiaries that make up private equity portfolios, said Ashley Schapitl, a spokeswoman for Senate Finance Committee Chairman Ron Wyden (D-Ore.), who called industry claims to that effect “nonsense.”
Independent analysts largely agreed with that reading of the provision. “The language in the bill was intended to make sure they are treated the same way,” said Steve Wamhoff, a tax expert at the Institute on Taxation and Economic Policy, a left-leaning think tank. “The idea that billion-dollar private equity funds must be protected to save small businesses is absolutely absurd.”
Steve Rosenthal, a tax policy analyst at the Tax Policy Center, a nonpartisan think tank, said his take is that “smaller firms would not be hit” by the original provision. “But it could be clarified,” he added.
Still, confusion over the provision touched off a late scramble to strip it from the bill. In recent days, private equity advocates circulated a document to lawmakers claiming the tax could hit 18,000 firms that employ 12 million people, according to a copy obtained by The Washington Post. The document called the measure a “new stealth tax” that would put small firms owned by private equity at a “competitive disadvantage by subjecting them to the book minimum tax when their similarly sized competitors would not be subject.”
Republicans seized on the issue, and Sen. John Thune (R-S.D.) worked with Sinema to craft an amendment to clarify that profits from subsidiaries would not have to be tallied to determine whether a firm is subject to the new minimum tax. On Sunday, the Senate voted 57-43 to adopt the change. In addition to Sinema, six Democrats voted yes: Sinema’s fellow senator from Arizona, Mark Kelly; Catherine Cortez Masto and Jacky Rosen of Nevada; Jon Ossoff and Raphael G. Warnock of Georgia; and Maggie Hassan of New Hampshire.
The Senate later voted 51-50 to make up the lost revenue by limiting “pass-through” companies — which can include private-equity firms — from claiming more than $250,000 in annual tax deductions.