Dem vs. Dem — showdown on taxes bill

Sen. John Kerry is leading a group of Democratic senators who object to legislation raising taxes on venture capital firms during tough economic times.

Kerry (Mass.) and Sens. Jeanne Shaheen (N.H.) and Maria Cantwell (Wash.) are part of a dissident group of Democrats who oppose raising the tax to offset the cost of extending unemployment benefits.

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They fear increasing taxes on venture capital firms would stifle investment just as the economy rebounds from the recession.

“If you raise the tax rate on venture capital it means there will be less money to invest at a time when the economy is still recovering,” said Shaheen. “I think it’s important to have as much money in the private sector to invest as we can.”

Critics who support the tax to pay for unemployment benefits argue the three Democrats are putting well-heeled venture capital firms ahead of working men and women who need help.

The package also includes extended federal subsidies of COBRA healthcare premiums, increased federal Medicaid assistance to states and an important research-and-development tax credit.

Shaheen and her allies say that it makes no sense to raise the tax rate on venture capital firms. The proposal would tax carried interest, or the profits that venture capital firms and hedge fund managers earn from investments, at the regular income tax rate instead of the lower capital gains rate.

The federal capital gains tax is 15 percent, while ordinarily the nation’s top earners must pay 35 percent.

A source close to Kerry said he is not looking for a carve-out to only help venture capital firms but wants to lighten the tax hit on all affected industries.

 Kerry has suggested options to Finance Committee Chairman Max Baucus (D-Mont.) “that would make changes to the House language that would affect all impacted industries,” the source said.

Venture capital firms are concentrated in Boston along with New York, and Kerry voiced reservations about raising taxes on investment income when President Barack Obama first proposed it in early 2009.

 Senate Majority Leader Harry Reid (D-Nev.) has said the so-called extenders package must pass by Memorial Day, but the concerns of Kerry and other senators make it more difficult.

 Reid told colleagues the package was crucial to the recovery of the economy.

 “We have parts of that extenders bill, Mr. President, that are essential to the economic recovery,” Reid said on the Senate floor. “One is the tax credit for research and development that businesses absolutely need; the uncertainty of it is really hurting the overall economy.”

 Shaheen suggested that investors who are patient with their capital and make long-term commitments with their resources should not have to pay income-tax rates on their gains.

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 “Hopefully you can then separate real venture capital from efforts to just turn money around,” said Shaheen.

Baucus and House Democratic leaders have proposed a compromise to Kerry and his allies. The alternative proposal would set a new tax rate on investment income that would blend the capital gains and income tax rates, according to a source familiar with negotiations.

 “My concern is that generically there is a distinction between patient capital risk-taking, long-term investment versus the kinds of things that hedge funds do,” said Kerry.

 Kerry said he doesn’t like using the term “carve-out” for the changes he is pushing to help venture capital funds and other long-term, responsible investors.

 “There isn’t a one-size-fits-all solution,” said Kerry, who suggested that investment firms should be treated differently depending on what they invest in.

 He believes it doesn’t make sense to slap the same tax rate on investment firms that fund technology start-ups and hedge funds that invest in credit default swaps.

 Kerry denied that he has threatened to block the extenders package.

 “I just stated my position, which is that I think we ought to fix it,” Kerry said. “I haven’t made any other declarations of any kind. I only want to see if we can work something out.”

 Venture capital CEOs from Massachusetts have pressed Democratic lawmakers about potential tax increases on their carried interest income.  

Jeff Bussgang, a partner at the Boston venture capital firm Flybridge Capital Partners, described a recent trip 80 CEOs and business leaders made to Washington in a blog post on peHUB.com.

 The group met with Kerry and House Financial Services Committee Chairman Barney Frank (D-Mass.).

 Bussgang reported that Frank promised: “We will exempt venture capital from the carried interest tax.”

The total cost of the extenders package is not yet certain because lawmakers are still haggling over whether to include a costly long-term freeze in scheduled cuts to doctors’ Medicare reimbursements.