Democratic Lawmakers Expected To Re-Introduce Legislation to Abolish Capital Gain Tax Advantage For Investors
The tax rate on carried-interest investment income earned by real estate partnerships, private equity investors and hedge fund operators has once again become an issue for national debate -- this time, all the way to the 2012 presidential campaign.
Two prominent Michigan lawmakers announced that they are reviving efforts to reclassify the tax treatment for carried-interest income after Republican presidential hopeful Mitt Romney released tax records showing the former Massachusetts governor had benefitted from perfectly legal tax breaks that lowered his tax rate below that of the majority of taxpayers. For several years, democratic administrations and congresses have sought to abolish the favorable treatment of carried-interest income, currently taxed at the capital gains rate of 15%, and reclassify it to be taxed as ordinary income, which currently carries a maximum rate of 35%.
Under growing pressure from Republican rivals and other critics, Romney released more than 500 pages of 2010 and 2011 tax documents showing that the former governor and executive of private equity firm Bain Capital paid an effective tax rate of 13.9% on 2010 adjusted gross income of $21.6 million, and anticipates paying a 15.4% effective rate on 2011 adjusted gross income. More than half the income came from dividends and capital gains taxed at 15%.
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Although conventional wisdom has held that pro-tax legislation such as closing the carried interest loophole has almost no chance of passing a divided House and Senate in an election year, Democrats are attempting to capitalize on populist sentiments in the electorate over the growing divide between wealthy and middle-class Americans.
In an announcement on his congressional office web site, Rep. Sandy Levin said he will soon re-introduce legislation to raise the carried-interest tax and "correct a gaping loophole in our nation’s tax law that allows wealthy investment managers to pay a much lower tax rate than other Americans." Levin, the ranking Democrat on the House Ways and Means Committee, has twice introduced such bills since 2007, and legislation containing the provision has passed the House four times, and stalled in the Senate.
"Of all the tax loopholes that have tilted the tax code toward wealthy individuals, the carried interest loophole is one of the most egregious," said Sen. Carl Levin, D-Mich., Sandy Levin's brother who serves in the U.S. Senate and chairs the Senate Armed Services Committee. "Gov. Romney’s returns are a textbook example of the need to close this loophole.
"Republicans who are so determined to preserve the carried interest loophole and prevent any other attempt to restore revenues that can help us close the budget deficit in a balanced way are serving as the defenders of privilege."
Romney's camp indicated it might consider ending the carried-interest tax break if he is elected president, according to an aide said in a conference call Tuesday cited by the Wall Street Journal. However, the Romney campaign stepped back from those comments later in the afternoon, emphasizing the former governor doesn’t want to raise anyone's taxes.
Rupert Murdoch, chairman of News Corp., which publishes the Wall Street Journal, labeled carried interest a "racket" that has cost the federal government billions over many years, in the second of two Tweets from his official Twitter account last week.
"Romney tax uses long-term legal loophole. 'carried interest' makes all fund managers rich. Time both parties stopped selling out to Wall S," Murdoch tweeted the day before.
Billionaire Warren Buffett, a longtime critic of the tax treatment of carried interest, along with Murdoch and New York Mayor Michael R. Bloomberg, the founder and majority owner of Bloomberg News parent Bloomberg LP, told Bloomberg TV this week that Congress should fix the inequity.
A prominent Democrat who has blocked past efforts to eliminate carried interest, Sen. Charles Schumer of New York, told MSNBC on Tuesday he would now vote to end taxation of carried interest at the lower rate.
The Wall Street Journal, in an editorial in Wednesday editions, said "Mr. Romney should put his own returns in the trophy case as evidence of the need for a major tax reform: Lower, flatter rates and a broader base will generate more jobs and economic growth. It might be reasonable, for instance, to treat carried interest as regular income in the context of lowering the corporate rate to something that is remotely competitive world-wide."
However, such an effort would face a steep uphill climb on Capitol Hill, where few if any Republicans currently support such a move, and even prominent Democrats as Sen. John Kerry of Massachusetts and Sen. Ben Nelson of Missouri have opposed raising taxes on carried interest.
Previous efforts to change the carried-interest rate have died under organized and vocal opposition from Wall Street, supported by
commercial real estate and mortgage lending groups, which believe that higher taxes on carried interest will discourage ventures from investing in projects that create jobs and economic prosperity.
The House most recently passed carried-interest legislation in May 2010. But the bill died in the Senate, failing to win a two-thirds majority to avoid a filibuster. Expecting it to be resurrected during last summer’s debt ceiling debates, a coalition of 14 real estate organizations launched a pre-emptive strike in July, releasing a glossy ad asserting that the "job-killing tax hike" could derail a real estate recovery by disproportionately impacting small- to medium-sized real estate partnerships.
Such ventures rely on the carried interest tax advantage "to make up for the substantial risks and liabilities associated with long-term real estate ownership and development," according to the coalition, which includes The Real Estate Roundtable, International Council of Shopping Centers and Building Owners and Managers Association (BOMA) International, NAIOP, the American Hotel & Lodging Association and the Mortgage Bankers Association.
Last fall, President Obama again urged Congress to raise the carried-interest tax rate to fund his $450 billion jobs creation program. Real estate and private equity industry groups and Republicans in Congress quickly mobilized against Obama’s proposal in September, asserting that tax hikes in the jobs plan will weaken property markets, discourage job creation and damage the economy.
The National Multi Housing Council (NMHC) and the National Apartment Association (NAA) issued dire warnings to lawmakers on the "devastating effect such a tax increase would have on rental housing." The NMHC/NAA's position has not changed, said Kim Duty, vice president of communications for the National Multi Housing Council.
"We continue to oppose any change in the tax treatment of carried interest as detrimental to affordable housing production and Main Street," Duty said.