Extender bill will be a hard sell in the Senate

By Jay Heflin - 05/12/10 12:18 PM ET

Legislation extending several expiring measures that is being created by congressional tax leaders will be hard to pass in the Senate, according to several sources on and off Capitol Hill.

A chief reason for the resistance is the bill might ultimately tax carried interest at ordinary income rates. The investment-related compensation is now taxed at the much lower capital gains rate.

The change is expected to raise $20 billion by creating a roughly 24 percent tax increase on carried interest once it is fully phased in.

Members on both sides of the aisle are concerned that the provision will create a fair amount of political resistance to the bill.

"There always a chance with tax policy that you're going to get a backlash on one side of the aisle or the other and it could [sink] the extenders package," Sen. Mark Prior (D-Ark.) told The Hill, adding, "But I do trust [tax writers'] judgment to try to put something together that they feel like they could get 60 votes for."

Democratic leaders need at least 1 Republican senator to cross the aisle and support the bill. Sen. Chuck Grassley (R-Iowa), the ranking member on Senate Finance, told The Hill achieving that feat is a tall order because of how the legislation treats carried interest.

"I think it will be difficult," he said.

Grassley has also not been a part of any discussions on the bill.

"They're seeing what they can work out among the Democrats, first, between the Ways and Means Committee and Baucus' staff," he said.

Grassley is withholding judgement on the bill until he sees all its details. Sen. Ron Wyden (D-Ore.) is also taking a wait-and-see approach to the legislation.

"The rate [on] carried interest seems to change every 30 minutes," Wyden said. "I'll wait to review the latest proposal."

Some expect the bill to initially create a three-tiered tax system for carried interest before it is taxed as ordinary income. Under the plan provided to The Hill, real estate would incur a 25 percent tax, venture capital and private equity would absorb a 28 percent tax, and hedge funds would be hit with a 35 percent tax.

Sen. Orrin Hatch (R-Utah) believes the tax increases are ill-timed given the volatility in the market.

"A lot of hedge funds have gone belly up," he told The Hill. "Some others aren't doing as well as they should and others are doing well. And one reason they can survive is if we don't raise taxes."

Prior agreed that a tax increase on carried interest could negatively affect the market.

"It could," he said. "It certainly could."