The bipartisan duo of Sens. Kyrsten Sinema and John Thune helped private equity firms escape tens of billions of dollars in potential tax increases and instead walk away with relief from the new 15% corporate minimum tax in the Inflation Reduction Act.
The House of Representatives is expected to vote on the bill Friday after the Senate OK’d the measure on Sunday. The wide-ranging legislation addresses healthcare, climate and taxes, and comes after President Joe Biden’s more expensive Build Back Better proposal stalled on Capitol Hill.
The House vote comes after a flurry of activity that enveloped the private equity industry, which comprised about 6.5% of U.S. GDP in 2020, according to a study.
Earlier versions of the bill would have generated $14 billion a year by closing the so-called carried interest tax loophole. It allows private equity managers to tax profits from the sale of portfolio companies as capital gains, not income. Capital gains taxes top out at 20% while the top bracket for income remains 37%.
Sinema, an Arizona Democrat who has drawn campaign support from private equity firms, managed to use her leverage to keep the carried interest tax loophole intact. Democrats needed 50 votes to pass the bill under the so-called reconciliation process, meaning the party couldn’t lose a single senator in the evenly divided Senate.
At a press conference on Friday, Senate Majority Leader Chuck Schumer of New York said lawmakers had no choice other than removing the measure.
To make up for the potential tax revenue, Senate Finance Committee Chairman Ron Wyden, an Oregon Democrat, included language to require private equity portfolio companies controlled by private equity firms or funds with more than $1 billion in income to pay the 15% corporate minimum tax.
On Sunday, South Dakota Republican Thune said the measure would have generated $35 billion in taxes from separate businesses of any size held by funds or partnerships. It would have subjected each respective company to the new tax even if its own income is too low, Thune said. More than 18,000 small- and medium-sized businesses in the U.S. that employ 11.7 million workers faced higher taxes, Thune said.
On Sunday, the Thune amendment that would prevent companies to aggregate their income to determine if they must pay the 15% corporate minimum tax passed the Senate by a vote of 57 to 43. Sinema and six other Democrats voted “yes.”
The measure was followed by a vote of 51 to 50 to compensate for the lost tax revenue by capping tax deductions at $250,000 for “pass through” companies, or units of larger entities that would include private equity portfolio companies.
The American Investment Council, which is the main lobbying group for larger private equity firms, praised the passage of the Thune amendment.
“This vote demonstrated strong bipartisan opposition to a new tax on small and medium size businesses,” AIC president and CEO Drew Maloney said in a prepared statement emailed to MarketWatch.
Steve Warnoff, of the left-leaning Institute on Taxation and Economic Policy, said the Thune amendment allows the largest private equity firms to avoid paying the corporate minimum tax while other corporations must shoulder the new tax.
“It is astounding that this Senate bill began with a provision to close a loophole for the private equity industry and it ended by not only removing that provision but also creating a new loophole to ensure that the tax increase for enormous companies would not apply to them,” Warnoff said in an email to MarketWatch.
Citing two people familiar with Sinema’s conversations over the weekend, The Washington Post reported that without the Thune amendment, Sinema felt that the corporate minimum tax on private equity portfolio companies would violate a pledge by Democrats to avoid raising taxes on smaller companies.