Group fights higher taxes on buyout firms, funds
WASHINGTON (Reuters) - The private equity industry and its friends are fighting back against legislation that would more than double their tax rate to 35 percent, contending the proposals would hurt average Americans and not just multimillionaire fund managers.
Republican Rep. Eric Cantor of Virginia is heading a coalition backed by the financial services, real estate, resort and energy industries to thwart a U.S. House bill that takes aim at the 15 percent tax rate now paid by most managers of private equity funds, hedge funds and other investment partnerships.
The Coalition for the Freedom of American Investors and Retirees also opposes a bipartisan Senate bill that would close a loophole that allows private equity firms to go public as partnerships without paying corporate taxes.
Both bills are targeting the well-heeled managers of firms such as Blackstone Group <BX.N>, that completed its initial public offering last month despite calls from some lawmakers and labor representatives for a delay.
KKR & Co. LP <KKR.UL>, the prominent U.S. buyout firm that pioneered the leveraged buyout industry, and Och-Ziff Capital Management have also filed for IPOs.
Sponsors of the bills say raising the rates would improve the fairness of the tax code, but Cantor's coalition says the legislation will hurt ordinary Americans whose pension funds are often invested with these firms.
"The bill applies to everyone that is involved in asset management business," said Cantor.
"Ultimately, the people who will be negatively impacted ... will be the blue jeans-wearing Americans who frankly rely on their retirement funds, both in the public and private sector, to secure their retirement," he said.
Groups lining up against the bills include the U.S. Chamber of Commerce, the Managed Funds Association, the Securities Industry and Financial Markets Association, the National Association of Real Estate Investment Trusts and the International Council of Shopping Centers.
Private equity funds, which have recently bought or are buying a range of household names such as Hilton Hotels Corp. <HLT.N> and Chrysler Group, the U.S. unit of DaimlerChrysler AG <DCXGn.DE>, are casting a wide net to gather support.
Other industries closely watching the legislation include restaurants, forest products, mining, agriculture, beverage distributors and manufacturers, according to one lobbyist.
The coalition so far counts Cantor and three other Republicans on the powerful House Ways and Means tax-writing panel as its members. Another key member is Alabama Rep. Spencer Bachus, the top Republican on the House Financial Services committee.
On the Senate side, there are similar rumblings about forming a coalition to block a tax rate increase on money managers, although an aide said the talks were not far along.
The AFL-CIO labor group, which is backing both tax bills, called the opposition's arguments ridiculous.
"The whole thing is preposterous and has nothing to do with anything other than the fact that a lot of very rich people here don't like paying taxes," said Damon Silvers, associate general counsel for the labor federation.
The bills were introduced last month as Blackstone went public, raising more than $4 billion. Blackstone chief executive Stephen Schwarzman's stake in the firm was valued at above $7 billion, and he also received a one-time payment of up to $677 million.
The House bill would raise the tax rate to 35 percent on a fund's "carried interest," or the 20 percent cut of profits beyond targeted returns typically kept by a fund manager. Currently, a fund manager pays the 15 percent capital gains tax rate on the profits.
The U.S. Chamber of Commerce said it began forming a strategy to fight the tax legislation before either bill was introduced.
"Carried interest is a widely used mechanism... so it will affect more than hedge funds and private equity," said Ashley Miller, a lobbyist for the Chamber. "You are going to hurt working Americans, police officers and nurses who are getting very high returns from the funds. Any time you start taxing something you will get less of it."
Miller declined to say how much the Chamber planned to spend on fighting the tax bills.
Another key player in the lobbying fight is the Private Equity Council, a group formed several months ago to represent the rapidly growing industry. A spokesman for the group said there was a fluid and broad-based coalition forming. 