House approves increased tax on fund managers

The House of Representatives has narrowly passed a bill that aims to raises taxes on private equity and hedge fund managers by roughly $48 billion. The bill now heads to the Senate, and if approved, is likely to be vetoed by President Bush.

Tax legislation that includes more than doubling the tax rate on carried interest has been approved by the US House of Representatives, by a vote of 216-193.

“The relatively small margin by which the House today passed legislation raising taxes on private equity, venture capital and real estate partnerships demonstrates widespread concern about this new investment tax,” the Private Equity Council, an industry lobbying group, said in a statement. “The Private Equity council will continue its efforts to persuade the Senate that the House bill could dampen economic growth at a time of an unsettled economy and gyrating financial markets.”

Charles Rangel

Introduced by Ways and Means Committee Chairman Charles Rangel, the bill centres around abolition of the Alternative Minimum Tax act; it proposes to counterbalance the $48 billion in tax revenue that would be lost from the act’s repeal by increasing taxes for the alternative investment industries.

The bill would cause carried interest to lose its capital gains tax treatment, a rate of 15 percent, and be taxed as ordinary income at a rate of 35 percent. Rangel, who has called his bill the “mother of all tax bills”, estimates raising the tax on carry would generate $25.7 billion in a 10-year period. The bill also would force hedge fund managers to pay tax on any compensation deferred to offshore bank accounts.

The Private Equity Council, National Venture Capital Association and the International Council of Shopping Centers have come out in opposition to the legislation, which Republicans including New York Congressman Thomas Reynolds and Missouri Congressman Roy Blunt, the House's second-ranking Republican and party whip, are calling “the mother of all tax hikes”.

The House vote was for the most part along party lines, with all Republicans and eight Democrats voting against the bill. It now heads to the Senate, whose finance committee has held numerous hearings on private equity and carried interest taxation, and thus far failed to reach a consensus that its designation should be changed to ordinary income.

Should the Senate pass the bill, the Bush administration has indicated it would exercise its veto power.