Lobbyists for the private equity and hedge fund industries have targeted vulnerable freshmen who may need cash for tough reelection battles in order to stave off a tax hike on fund managers’ carried interest.

Industry representatives met with staff for Democratic Reps. Joe Courtney (Conn.), Nick Lampson (Texas), Tim Mahoney (Fla.) and Baron Hill (Ind.) last week. All are freshman members of the Democrats’ Frontline program for endangered incumbents. The U.S. Chamber of Commerce, a member of the coalition fighting the tax change, arranged the meetings.

Courtney vowed to “absolutely support” the legislation, which would more than double the tax rate on the carried interest used widely in the private equity and hedge fund industries to compensate investment managers. The lobbyists’ arguments were “not very convincing,” he explained, especially since he doesn’t represent the ritzier residents of Connecticut, home to many hedge funds.

“This is not Gold Coast Connecticut. Everybody pays the full boat on their taxes. It’s not a hedge fund enclave,” he said in an interview.

Meanwhile, Mahoney, a former financier and a member of the pro-business Blue Dog Coalition, passionately opposes the tax increase. His staff also met with industry lobbyists last week. However, he said his position was already firmly set, based on his years in the financial industry and research he conducted as head of a Blue Dog task force on the issue.

“I’ve come to the conclusion that it won’t generate the money that [other Democrats] think and will adversely impact investment,” Mahoney said.

Staff for Lampson, one of the most vulnerable freshmen, met last week with lobbyists trying to defeat the tax increase. The congressman has not yet formed a stance on the bill because he is still reviewing the legislation, a spokesman said.

A spokeswoman for Hill declined to comment for this story. Hill and Lampson are freshmen, but have previously served in the House.

The freshmen known to have been courted by the private equity industry will need plenty of campaign cash to hold on to their seats. However, they have all amassed impressive war chests so far this election cycle.

Mahoney has raised $1.3 million, while Courtney has raised nearly $900,000. Hill and Lampson have roughly $870,000 and $833,000 cash on hand, respectively. This puts them toward the top of all freshmen in the House in terms of fundraising.

The freshmen are also likely targets because of their moderate views. In addition to Mahoney, Hill and Lampson are Blue Dogs. Along with lawmakers belonging to the New Democrat Coalition, Blue Dogs are a logical group for private equity and hedge fund lobbyists to meet with to gain a sympathetic hearing.

Bruce Josten, the Chamber’s executive vice president for governmental affairs, said that lobbyists put freshmen in the same category as pro-business Democrats “just because they’re freshmen” and therefore often haven’t developed firm stances on issues.

“Wherever there’s a blank piece of paper, it’s an opportunity,” he said.

The carried interest measure is attached as an offset to a $76 billion tax package that would extend several popular tax breaks and patch the Alternative Minimum Tax (AMT) for one year. Up to 23 million filers will get hit with the AMT next spring unless a patch is passed this year.

Many Democrats, including Ways and Means Committee Chairman Charles Rangel (N.Y.), support the tax increase because they believe that fund managers benefit from a loophole that allows them to pay the lower 15 percent capital gains rate on the carried interest that makes up the bulk of their pay. They argue that carried interest is really payment for services the managers provide that should be taxed at ordinary income rates, which are as high as 35 percent.

“Democrats are supportive of this bill because it provides strong middle-class tax relief and it’s also an issue of fairness and fiscal responsibility,” Rep. Steny Hoyer (D-Md.), the House majority leader, said. “It provides tax relief to millions of families without adding to the debt while closing an unfair loophole that allows a privileged few to avoid paying their fair share of taxes.”

Opponents warn that the tax change will deal a blow to the economy, hurting millions of partnerships that use carried interest, including those in the real estate and venture capital sectors. Rep. Eric Cantor (Va.), a member of the Republican leadership who has headed up the charge against the tax increase, calls it a “job-killer” that will hurt retirees who invest in private equity deals through pension funds.

Cantor also predicted that Democrats would join Republicans in opposing the measure on the argument that offsetting the AMT patch with a tax increase would set a precedent for larger tax increases down the road: “I do think we’re going to have a bipartisan opposition to raising taxes.”

Moderate Democrats are in a tough spot over the issue because they pushed the leadership to reinstate pay-as-you-go budget rules and are reluctant to waive them to pass the AMT patch. Yet many of them are wary of a tax change that will affect so many partnerships. Moreover, the Senate has signaled it won’t go along with the measure, raising questions about the leadership’s wisdom in forcing members to take a tough vote.

Rep. Rahm Emanuel (Ill.), the Democratic Caucus chairman, showed misgivings about the strategy when he circulated a memo to leadership suggesting that the offsets be dropped from the tax package.  

Rep. Allen Boyd (D-Fla.), a leader of the Blue Dogs, said he was opposed to the carried interest tax change, but doubted the coalition would be voting as a bloc on the measure.

Rep. Mike Ross (D-Ark.), the group’s co-chairman for communications, suggested on Wednesday, following a Blue Dog meeting on Tuesday night to discuss the measure, that many Blue Dogs would go along with the tax increase.
“The Blue Dogs will continue to be staunch advocates of pay-go as a way to restore fiscal discipline to the federal government,” he said in an e-mail to The Hill. “Just like all the other bills that have passed the House this year, the AMT ‘fix’ must adhere to this standard of fiscal discipline.”