By Jay Heflin - 05/12/10 11:42 PM EDT
House Democrats want to raise taxes on hedge fund managers and venture capitalists to pay for an extension of popular tax breaks.
The tax breaks, which include the research and development credits for business and college tax credits for individuals, is expected to cost about $50 billion and must be offset with other tax hikes or spending cuts under the pay-as-you-go law the House approved.
The package could hit the House floor soon, as the tax breaks are being packaged with spending measures, including an extension of unemployment benefits, that are set to expire next month.
Other tax increases on the list are also opposed by business groups and Republicans, including a requirement that certain smaller businesses that register as S corporations pay employment taxes. That change would raise $10 billion, but opponents argue the tax would reduce those businesses’ capital.
Efforts are under way to pull the provision from the proposal, and some lobbyists said they would be surprised if it winds up in the final bill.
The dispute on hedge fund taxation cuts to the heart of ideology for both parties. Democrats say the tax increase adds a new level of fairness to the tax code, while Republicans warn its enactment will ruin the economy.
“A lot of hedge funds have gone belly up,” Sen. Orrin Hatch (R-Utah) 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,” said Hatch. “Frankly, this administration will raise any tax it can.”
Managers of hedge funds are usually paid in “carried interest,” a term that describes a manager’s share of profits in certain types of partnerships. Payouts are currently taxed at the 15 percent capital gains rate, but Democrats want the levy to resemble ordinary income rates, which are expected to be more than 39 percent next year.
House Ways and Means Chairman Sandy Levin (D-Mich.) sees the tax increase as a fairness issue and argues that carried interest should be taxed as income since it is identical to workers’ wages that are taxed at the higher ordinary income rates.
While the tax package could move through the House with the support of Democrats, it will need at least one Republican vote in the Senate, assuming all 59 Democrats support it.
Levin has been negotiating with Senate Finance Committee Chairman Max Baucus (D-Mont.) on the package.
Rep. Earl Pomeroy (D-N.D.), a Ways and Means member, said House negotiators are drafting legislation with the Senate in mind.
“It has been built in discussions back and forth between the House and the Senate, unlike a lot of times where we will take action here independent of what happens in the Senate and it goes nowhere,” he said.
Sen. Chuck Grassley (Iowa), the ranking Republican on Finance, told The Hill that achieving 60 votes is a tall order because of how the legislation treats carried interest. “I think it will be difficult,” Grassley said.
Senate Democratic leaders are hoping to win support from GOP centrists such as Sens. Olympia Snowe (Maine), Susan Collins (Maine), George Voinovich (Ohio) and Scott Brown (Mass.), said a Democratic aide.