The other local tax reduction for private equity

Private equity lobbyists are very well paid, but they can still be underpaid.

Driving the news: In addition to helping save deferred interest tax relief, as part of the Cut Inflation Act negotiations, private equity has also fended off a costlier effort to raise corporate taxes. of portfolio.

  • This would have been a minimum accounting tax of 15% applied to any company within a private equity fund that generated at least $1 billion in total profits.
  • In short, each portfolio company would be treated as part of a conglomerate. Even if they really aren’t, as we’ve already explained when explaining why private equity funds aren’t prone to systemic risk.
  • Additionally, the rule would have created perverse incentives for portfolio construction — incentivizing equity to back less profitable companies early in fund cycles, to stay below the $1 billion threshold for as long as possible.

Past: The 15% private equity proposal first appeared in early drafts of the failed Build Back Better bill, but was not in the original IRA agreement between Sens. Chuck Schumer (DN.Y.) and Joe Manchin (DW.Va.).

  • A source close to the process says the CBO mistakenly included the provision in its calculations of the IRA’s budget impact, saying it would generate about $35 billion in federal revenue over 10 years.
  • It set off a chain reaction in the vote-a-rama, as there was no way Manchin or Sen. Kyrsten Sinema (D-Arizona) would support adding the clause. Moreover, GOP Senate candidates like Arizona’s Blake Masters took advantage on social media, arguing (correctly) that a tax aimed at mega-corporations was extended to small and medium-sized businesses.
  • Sen. John Thune (RS.D.) proposed compensation that would have limited SALT deductions, but that would have been prohibited for Democrats in high-tax states like New Jersey.
  • Sen. Mark Warner (D-Va.), a former venture capitalist who had regular talks with Manchin before the IRA was introduced, revived a previously dropped extension on deductibility caps on excess business losses passed on . A source close to Warner says he crafted the Savior Amendment on the fly, without staff input.

The bottom line: The ported interest effort was poorly written, but at least well-intentioned (based on my longstanding assertion that portering is fee-for-service). The 15% accounting minimum tax on private equity portfolio companies, on the other hand, was abysmal from the jump and deserved its demise.

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