WASHINGTON – An hour after Democrats released the text of their climate and tax legislation, Washington lobbyists for the private equity industry jumped into action.
With a final Senate vote on the big package approaching Sunday, a late addition would have subjected companies controlled by private investment funds to a new minimum tax of 15 percent in the legislation, which was intended to apply to America’s largest corporations.
But a last-minute mobilization of political forces and direct pleas to Senator Kyrsten Sinema, the Arizona Democrat who opposes tax increases and sympathizes with private equity, resulted in the measure being scrapped. The lightning bolt was emblematic of the chaotic nature of tax policy and how measures to curb tax avoidance can produce new carve-outs in the blink of an eye.
The problem arises from the way private equity firms work: they typically invest in a portfolio of companies. Under the contested provision, all such companies, even if small or medium-sized, would be liable to pay if the combined “book revenue” of companies controlled by the same private equity fund exceeded $1 billion under the new 15- percent tax on the income they reported to their shareholders.
“Looks like someone’s trying to sneak past everyone.” Neil BradleyChief Policy Officer at the US Chamber of Commerce, on Twitter on Saturday.
freedom worksa conservative organization campaigning for lower taxes warned on its Twitter feed, claiming Democrats are targeting small businesses that rely on capital investment to expand.
Private equity industry groups circulated opposition research into what they called a “stealth” tax that they said would hit more than 18,000 companies.
At Ms Sinema’s urging, the measure was lifted after hours of horse-trading over how to replace the estimated $35 billion in government revenue lost by an exit from the proposal. Ultimately, lawmakers chose to extend a rule Republicans enacted in 2017 limiting the deductions companies can take for business losses.
The new minimum tax for corporations had already been lowered before the changes over the weekend. Ms Sinema last week urged keeping deductions that manufacturers use to offset the cost of buying equipment, and lawmakers decided to keep a deduction for radio spectrum purchases that telecom companies said is important for the rollout of high-speed broadband .
What does the climate, health and tax law say?
The big win for private equity lobbyists was carried interest. Democrats had proposed limiting the special tax treatment hedge fund managers and private equity executives get on the investment gains they receive in compensation. After Ms. Sinema objected, the carried interest cap was replaced by a 1 percent excise tax on company stock repurchases.
Tax experts have already been skeptical about the corporate minimum tax, saying companies could maneuver around paying it.
“The minimum tax has always been like a 10-best solution, and if you start taking out more items, is it now the 12-best solution?” said Steven M. Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, noting that relatively few companies would now be confronted with the new tax. “There may be more government personnel dedicated to auditing these companies than companies subject to the tax.”
The Joint Taxation Committee had estimated that the new minimum corporation tax would apply to 150 companies, but that was before more exemptions were introduced into the legislation. The tax was projected to bring in more than $300 billion in new revenue over a decade, but the trimmed version is likely to bring in just over $200 billion.
“The problem that remains is that corporations will end up paying little in taxes anyway,” said Kyle Pomerleau, senior fellow at the American Enterprise Institute.
Mr. Pomerleau also complained that by taxing accounting receipts, Congress was relinquishing some control over tax policy to the Financial Accounting Standards Board, an independent organization that sets accounting rules. Accounting income is the profit that companies report to shareholders and investors on their income statements, which are generally subject to these accounting rules.
The new tax is said to target big companies like Amazon and Meta, which for years have found ways to lower their tax rates by taking advantage of deductions in tax legislation. Tax experts generally prefer increasing tax rates — the current corporate rate is 21 percent — or reducing deductions. But because Republicans were unanimously opposed to this approach and Democrats didn’t have enough votes for it, they agreed on the corporate minimum tax.
Progressives expressed disappointment after Democrats repealed the measure, which would have affected companies controlled by private equity, and accused Ms Sinema of being beholden to Wall Street and lobbyists.
“Whatever job she gets on Wall Street after losing her elementary school, they can’t pay her enough.” Adam GreenCo-founder of the Progressive Change Campaign Committee, wrote on Twitter.
The House of Representatives is expected to pass the Senate bill this week, with President Biden signing it into law soon after. The tax changes would go into effect next year, and the Treasury Department would seek to develop regulations and guidance on how to interpret parts of the law.
Ms Sinema said in a tweet on Sunday that she was proud of the outcome of the negotiations She said would boost innovation and job creation.
Mark Mazur, a former deputy assistant secretary for tax policy at the Treasury Department, said the corporate minimum tax is “not the best policy” and that accounting firms are likely to comb through the legislation to determine how their clients could avoid the new tax.
“It’s almost an admission that Congress can’t do the right thing and reclaim the tax breaks it’s been given, so it has to do it through the back door,” said Mr. Mazur, who left the Treasury Department in October 2014 and has been a senior for nearly 30 years function in the federal government.
He predicted companies would find new ways to reduce their tax burden, adding, “There are ways to do things and you can expect at least aggressive taxpayers to explore those options.”