Private Equity Lobby Gets Exemption From Tax Increases In Inflation Reduction Act

Suspension

Democratic senators agreed Sunday to protect companies owned by the private equity sector from imposing new minimum taxes on $1 billion in corporations, bowing to pressure from the senator. Kyrsten Sinema (D-Ariz.), who agreed to make the change in the Democrats’ sprawling package of climate, health care and taxes.

The decision came as Democrats attempted to hold their campaign rally during nearly 19 hours of debate over the 2022 Inflation Cut Act, which the Senate approved by 50-50 on Sunday with the help of a deciding vote from Vice President Harris.

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The package proposes hundreds of billions of dollars in new spending, funded in part by new taxes, including a minimum corporate tax rate that requires companies with annual profits of more than $1 billion to pay a tax rate of at least 15%. As originally written, the clause would have required private equity firms to tally profits from their various holdings and pay tax if the total exceeded the billion-dollar threshold.

Cinema, which for more than a year halted Democrats’ ambitions to raise taxes, raised objections Saturday, according to two people familiar with the matter, who spoke on the condition of anonymity to discuss private conversations. The senator argued that without changes to the bill, small and medium-sized businesses that happened to be owned by private equity firms would be subject to the tax, violating Democrats’ pledge to raise taxes only on the largest corporations. A spokeswoman for the cinema said several small businesses in Arizona, including a nursery, have 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 “transfer interest loop”, which allows investment managers to pay lower rates on certain parts of their income.

In a statement, Sinema’s office said its goal is to “target tax evasion, make tax law more efficient, and support Arizona’s economic growth and competitiveness.”

“In a time of record inflation, rising interest rates, and slowing economic growth, Senator Senema knows that discouraging investments in Arizona’s business would harm the ability of the Arizona economy to create jobs, and she has ensured that the Inflation Control Act helps the Arizona economy grow,” The statement said.

The last-minute changes represent a major victory for the private equity industry and an estimated $35 billion in savings over the next decade. Private equity accounts for nearly $4 trillion of the industry in the United States, and with the sector growing significantly over the past decade, it has repeatedly flexed its political power in Washington.

From the start, the unusual way private equity firms are regulated has challenged Democrats crafting the new minimum tax. Usually, large conglomerates are formed as “C corporations” under the tax code and pay corporate taxes. It is clear that the new minimum tax applies to them. But private equity firms are legally formed as partnerships, which usually pay taxes on individual returns to their owners. Senate Democrats say they drafted the legislation to ensure wealthy investment managers who own many C corporations and other business entities totaling more than $1 billion in total are taxed.

Ashley Chapitel, a spokeswoman for Senate Finance Committee Chairman Ron Wyden (D-OR), said the tax was never intended to hit smaller subsidiaries that make up private equity portfolios, and called the industry’s claims to that effect “nonsense.”

Independent analysts largely agreed with that reading of the item. “The language in the bill was meant to make sure they were treated in the same way,” said Steve Wamhoff, a tax expert at the Institute for Tax and Economic Policy, a left-leaning think tank. “The idea that billions of dollars in private equity funds should be protected to save small businesses is completely absurd.”

Steve Rosenthal, a tax policy analyst at the Center for Tax Policy, a nonpartisan think tank, said his view was that “small businesses wouldn’t be affected” by the original clause. “But that can be clarified,” he added.

However, confusion over the ruling led to a late rush to strip him of the bill. In recent days, private equity advocates distributed a document to lawmakers claiming the tax could amount to 18,000 companies that employ 12 million people, according to a copy obtained by The Washington Post. The document described the measure as a “new hidden tax” that would put small private equity firms at a “competitive disadvantage by subjecting them to the minimum tax when they are not subject to competitors of the same size”.

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Republicans are sewing this issue, the senator. John Thune (RS.D.) worked with Cinema to draft an amendment to clarify that profits from affiliates would not have to be recorded to determine if the company is subject to the new minimum tax. On Sunday, the Senate voted 57 to 43 to approve the change. In addition to Cinema, six Democrats voted yes: Cinema’s fellow Senate member from Arizona, Mark Kelly; Catherine Cortez Masto and Jackie Rosen of Nevada; John Usoff and Raphael J. Warnock of Georgia; Maggie Hassan is from New Hampshire.

The Senate subsequently voted 51-50 to make up for lost revenue by limiting “transit” companies — which can include private equity firms — from claiming more than $250,000 in annual tax deductions.

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