Lawmakers scrutinize private equity industry

The alternative investment industry will be under the microscope tomorrow in three hearings on Capitol Hill, as lobbyists predict the fight over tax increases on the hedge fund and private equity industry will become a cash cow for lawmakers.

“We’ll raise a lot of money and so will the Democrats,” one Republican lobbyist working to sink the proposed tax hike said, referring to an expected flood of funds from Wall Street to lawmakers.

Two House committees tomorrow will probe the risk posed to ordinary investors by hedge funds, while the Senate Finance Committee will examine the tax treatment of the so-called “carried interest” used to compensate managers of private equity, real estate and other investment funds in the first of two hearings on the issue.

Last month, Rep. Sandy Levin (D-Mich.), the chairman of the Ways and Means subcommittee on trade, introduced legislation to change the taxation of carried interest used widely in the private equity industry from the 15 percent rate used for capital gains to ordinary income rates as high as 35 percent, unleashing a lobbying storm.

The change would also affect a broad swath of investment funds organized as partnerships, including many in the real estate, venture capital and oil and gas sectors. The Private Equity Council, a fledgling industry trade group, the U.S. Chamber of Commerce, the Real Estate Roundtable, the Financial Services Roundtable and an army of contract lobbyists have joined forces to defeat the measure.

Opponents claim the legislation will crimp returns on pension fund investments in private equity as managers pass on some or all of the increased tax burden to investors.

“If you’re going to tax the whole industry, who is going to bear the brunt of that tax? The customers,” David Chavern, the chief operating officer of the U.S. Chamber of Commerce, argued.

Labor unions, which have joined Democrats to push the change, insist this is nonsense. “What’s happening here is that a handful of extraordinarily wealthy people are hiding behind workers’ pensions in an effort to avoid paying the same taxes everyone else pays,” Damon Silvers, the associate general counsel for the AFL-CIO, said.

He disputed the notion that higher taxes on private-equity funds would be passed on easily to investors: “Most public pension fund managers feel somewhat uneasy about what they’re already paying [to investment managers].”

In the Finance Committee hearing, Eric Solomon, the assistant secretary for tax policy at the U.S. Treasury, is expected to take a dim view of any change to the tax treatment of carried interest, reflecting Treasury Secretary Henry Paulson’s recent warning that such a move could have “unintended consequences.”

Also at the hearing, Congressional Budget Office Director Peter Orszag, Andrew Donohue of the Division of Investment Management at the Securities and Exchange Commission, a legal expert and a representative from the venture capital industry will testify.

No senator has introduced a bill on carried interest, but Finance Committee staffers have been studying the issue for months. Sens. Max BaucusMax Sieben BaucusBaucus backing Biden's 2020 bid Bottom line Overnight Defense: McCain honored in Capitol ceremony | Mattis extends border deployment | Trump to embark on four-country trip after midterms MORE (D-Mont.) and Chuck GrassleyCharles (Chuck) Ernest GrassleyPelosi floats undoing SALT deduction cap in next coronavirus bill Democrats eye additional relief checks for coronavirus Coronavirus pushes GOP's Biden-Burisma probe to back burner MORE (R-Iowa), the panel’s chairman and ranking member, introduced legislation, dubbed the “Blackstone bill,” last month to tax all publicly traded investment partnerships as corporations after a spate of hedge funds and the Blackstone Group, a private equity firm, announced plans to go public.

Levin’s bill has attracted the support of 11 Ways and Means Democrats as well as Rep. Charles Rangel (D-N.Y.), the panel’s chairman, and House Financial Services Committee Chairman Barney Frank (D-Mass.).

Rep. Peter WelchPeter Francis WelchDems unlikely to subpoena Bolton Democratic candidates gear up for a dramatic Super Tuesday A disaster for diplomacy and the Zionist dream MORE (D-Vt.), who has introduced a companion Blackstone bill in the House, said Levin’s carried interest legislation would flatten “an uneven playing field that’s in total conflict with any concept of competitive capitalism.”

With Reps. Tom Reynolds (R-N.Y.) and Paul RyanPaul Davis RyanWho should be the Democratic vice presidential candidate? The Pelosi administration It's not populism that's killing America's democracy MORE (R-Wis.), House Minority Whip Eric CantorEric Ivan CantorThe Democrats' strategy conundrum: a 'movement' or a coalition? The biggest political upsets of the decade Bottom Line MORE (R-Va.) is leading the charge against Levin’s bill, which he is casting as the first step by Democrats to unravel the Bush tax cuts on capital gains.

“This is their opening play,” Cantor’s chief of staff, Rob Collins, said. “They’re going to use such noble-sounding things as children’s health insurance and [Alternative Minimum Tax relief], but really this is a pay-for for their government programs they want to expand.”