Looking out for Main Street banks
GOP eyes limits on carried interest tax break
Republicans are targeting a controversial tax provision that critics say benefits wealthy hedge fund managers and other Wall Street types.
President Trump during his White House campaign said people using the tax rules on carried interest are "getting away with murder." The break generally benefits real estate investors, venture capitalists and some hedge fund managers.
Yet language targeting the provision was missing from the tax reform framework that the White House and congressional Republicans unveiled last week.
Republicans, mindful of the president's campaign rhetoric and the criticism that their plan skews toward the rich, say that doesn't mean there won't be changes coming.
"With carried interest, as the president has made that an issue in the campaign ... there are going to be reforms there that recognize what the president was talking about," said Rep. Tom Reed (R-N.Y.), a member of the tax-writing House Ways and Means Committee.
"As he has indicated, he is willing to look at the wealthy and say we are not looking to give them a tax break," he continued. "They have done very well since 2008, and they may well have to pay a little bit more."
Eliminating the break, which essentially allows a portion of certain investors' income to be taxed at the lower capital gains rate rather than the higher ordinary income rate, would just raise a few billion dollars of revenue a year.
But it's not about raising money so much as the issue of fairness, Democrats and some Republicans argue.
Many in the industries impacted say they've become a punching bag, while most average voters don't even understand how the break works.
"[Carried interest] has been put forward as the poster child of economic equality. Of course Trump's base doesn't necessarily understand what carry is - they see it as being used by fat cats on Wall Street," said an industry insider following the issue closely from Washington.
Whether criticism of the provision is fair or not, scrapping it could help Republicans as they make the case that the rich won't get a windfall from their plan.
That's especially true after the Tax Policy Center found the biggest tax cuts under the GOP framework would go to the wealthy, with many in the middle seeing their tax bill rise.
Republicans dismiss that analysis, noting that the final details of the tax plan will determine how much the wealthy pay in taxes.
Addressing the carried interest break "will be part of the overall package after the budget is done," Ways and Means Committee Chairman Kevin Brady (R-Texas) told The Hill, adding that no decisions have been made.
During Trump's campaign, he specifically blasted hedge fund managers over use of the break.
"The hedge fund guys are getting away with murder. They're making a tremendous amount of money. They have to pay taxes. I want to lower the rates for the middle class. The middle class is the one - they're getting absolutely destroyed. This country doesn't have, won't have a middle class very soon," Trump told CBS News in 2015.
But because the carried interest provision applies to long-term earnings and hedge fund managers buy and sell quickly, the break is actually used more by venture capitalists, private equity firms and real estate investors.
That has led to a scramble among the various industries that do benefit from the break to obtain an exemption in the legislation.
The last time Republicans proposed legislation to rewrite the tax code, former Rep. Dave Camp (R-Mich.) was chairman of the Ways and Means Committee. He proposed to cap the amount of income that could be reclassified at the lower capital gains rate, with an exemption for real estate investors.
Camp's plan is the most logical starting point for provisions the framework does not address, according to several former Republican tax staffers.
Evan Liddiard, a former tax aide to Senate Finance Committee Chairman Orrin Hatch (R-Utah) and now with the National Association of Realtors, said the exemption was in the Camp draft because real estate is different from high finance.
"It stands to reason people who are doing real estate deals on the ground - developing a strip mall, putting together an office building - are different," he said.
Rep. George Holding (R-N.C.), a member of the Ways and Means panel, said carried interest "is something we are certainly going to deal with."
He seemed to back an exception for real estate, which he estimates accounts for about 80 percent of those who use the provision.
"The president has made some statements about it. The vast majority of people who use carried interest are people that use it in real estate."
"When the president has talked about it in certain contexts ... [those] are not the vast majority of users."
But if hedge fund managers don't use the break much and real estate is exempted, who would be left?
The other two groups - venture capitalists and private equity funds - are making their voices heard.
Private equity in particular has an image problem. The industry's use of the break gained notoriety when 2012 Republican presidential nominee Mitt Romney's low overall tax rate was attributed to his use of the provision during his time at Bain Capital.
Democrats demonized Romney and firms like Bain as corporate raiders buying companies for big cash, selling them off and firing thousands of workers in the process.
Treasury Secretary Steven Mnuchin said recently that hedge funds would definitely be a target for changes. A department spokesman told Bloomberg News that private equity is also "on the table."
Rep. Darrell Issa (R-Calif.), whose home state contains much of the business activity that could be hit by a curb in the provision, said it is a fair target.
"Government should get out of the business of distorting business decisions," Issa said.
"Taking a look at things like carried interest, which allows you to get a current deduction and then a capital gains treatment, is clearly a business distortion that most people don't get the benefit of," he added.
Naomi Jagoda contributed reporting.