‘We expect it to be removed’: Democrats’ push to close ‘carried interest loophole’ in jeopardy as Sinema seeks to block effort

Sen. Kyrsten Sinema has signaled her opposition to closing a controversial tax loophole that allows carried interest to be taxed as capital gains instead of income, according to multiple reports.

As a proposal kicking around the Beltway for more than a decade, closing the carried interest tax loophole has won blessing in the U.S. House of Representatives several times, but it’s never won approval in the Senate.

It showed up again as part of the wide-ranging Inflation Reduction Act now under consideration in the Senate after Majority Leader Chuck Schumer, a New York Democrat, and Sen. Joe Manchin, a key West Virginia Democrat, announced a compromise last week.

Schumer has said he wants to begin the Senate-floor process this week, though that timing is unclear.

The $739 billion of proposed tax revenue in the Inflation Reduction Act is led by $313 billion from a corporate minimum tax of 15%. Closing the carried interest loophole is expected to generate a relatively minor $13 billion, according to a Congressional Budget Office analysis.

Politico reported late Wednesday that Sinema wants to scrap any effort to close the carried interest tax loophole. She also wants a $5 billion drought resiliency funding measure added to the bill, according to the report. The Wall Street Journal similarly reported that the Arizona Democrat was seeking to remove the carried-interest provision and add the funding to combat droughts.

Officially, Sinema has not said whether she will vote in favor or against the Inflation Reduction Act. Her support is key in the Senate, which is evenly divided between Democrats and Republicans.

Sinema, a moderate Democrat from Arizona, has also been a spoiler at times for Democrats along with Manchin. She promoted a scaled-down Build Back Better Act around her desire to avoid raising taxes on corporations and the wealthy.

The carried interest tax loophole allows private equity firms, hedge funds and their investors to tax income from investments as capital gains, which top out at 20%. The change would require these profits to be taxed as income, which tops out at 37%.

Closing the carried interest tax loophole was first proposed in 2007 by former House Ways and Means Committee ranking member Sander Levin, a Democrat from Michigan. Levin, 90, ended his last term in the House in 2019.

The proposal helped spark the creation of the Private Equity Growth Capital Council as a lobbying arm of the largest private equity firms.

The group has since changed its name to the American Investment Council (AIC).

Steve Klinsky, founder of private equity firm New Mountain Capital LLC and chairman of the AIC, said in a speech this week that taxing carried interest as income would be a punitive measure that “could depress investment and growth in the midst of a recession.”

Meanwhile, Treasury Secretary Janet Yellen said in a letter Tuesday that the Inflation Reduction Act would either reduce or have no effect on the taxes due or paid by any family with income less than $400,000 per year.

 Washington experts say that Sinema remains the key vote for the Inflation Reduction Act.

Manchin and Sinema have spoken about the measure, and Sinema has also been meeting with Senate Minority Leader Mitch McConnell, a Kentucky Republican, and Senate Minority Whip John Thune, a South Dakota Republican, according to Beacon Policy Advisors.

“The best chance to strip carried interest changes is before the bill goes to the floor,” Beacon said in a Wednesday summary. “To that end, Manchin yesterday didn’t say he was ‘adamant’ carried interest remains in the bill.”

Beacon analysts said they expect Sinema’s wishes on carried interest to prevail.

“Removing carried interest costs $13 billion. We expect it to be removed,” they wrote in a note on Thursday.

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