U.S. Senator Kyrsten Sinema (D-AZ) waits for an elevator heading into the Senate floor of the U.S. Capitol on August 2, 2022 in Washington, USA.
Jonathan Ernest | Reuters
Long before Sen. Kyrsten Sinema, D-Ariz., touted a massive spending bill that promised to create jobs, invest in clean energy and tax the rich — to deliver on some of the key campaign promises made by President Joe Biden and the Democratic Party – Wall Street investment firm employees had donated millions to the newly minted senator’s campaign.
One of their main objections was the bill’s so-called carried-interest tax provision — which would have filled a mysterious loophole in tax law that would have allowed hedge fund managers, law firm partners and private equity executives, among others, to pay significantly less tax than usual workers.
Closing that loophole, which would generate an estimated $14 billion in tax revenue over the next decade, should help fund $433 billion in spending on climate and health initiatives.
In a bid to get Sinema’s vote and pass the law, Senate Majority Leader Chuck Schumer said Democrats had “no choice” but to remove that provision from the broader Inflation Reduction Act. The bill instead imposes a 1% tax on all company stock repurchases and a minimum corporate tax rate of 15% for companies with revenues over $1 billion. The massive spending and tax package squeaked Sunday with Vice President Kamala Harris’ landmark vote through the evenly divided 51-50 Senate. It is expected to make its way past the house later this week.
American Investment Council
As Biden rallied support in the Senate to close the loophole a little over a year ago, the head of the trade group, which represents the world’s largest private equity firms, began pressuring Sinema and fellow Arizona resident Mark Kelly, who is also a Democrat to raise .
“Arizona Sens. Kyrsten Sinema and Mark Kelly will be critical voices and voices in the upcoming infrastructure debate,” wrote Drew Maloney, the president and CEO of the American Investment Council, in an op-ed published by an Arizona news outlet. The trading group represents some of the world’s largest private equity firms including Blackstone, Apollo Global Management, Carlyle Group and KKR. “I urge you to continue to support the role of private investment in supporting small businesses here in Arizona and across the country,” he added.
One of the group’s top priorities then and still is to “preserve carried interest capital gains and prevent the abolition of interest deductibility”.
“Our team has been working to ensure members of Congress on both sides of the aisle understand how private equity directly employs workers and supports small businesses in their communities,” Maloney said in a statement to CNBC. “Our advocacy helped prevent punitive tax increases that would make it harder for investors to continue supporting jobs, small businesses and pensions in every state.”
Sinema has been struggling to close the loophole for at least last year, when she told Democratic leaders she opposed closing the carried-interest tax break. It was later dropped from a house bill, according to NBC News.
Sinema’s opposition, along with a bevy of concerns from Sen. Joe Manchin, DW.V., helped scuttle a much broader version of the bill, which was trimmed significantly to win over the two moderate Democrats.
“What’s Best for Arizona”
“Senator Sinema makes every decision based on one criterion: what’s best for Arizona,” Sinema’s spokeswoman Hannah Hurley said in an email to CNBC. She said Sinema has been clear for over a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness. Sinema believes “discouraging” investment in Arizona businesses would hurt the state’s economy and ability to create jobs, Hurley said.
In the weeks leading up to Sunday’s vote, Sinema’s office was inundated with calls from lobbyists representing hedge funds, private equity firms and other wealth managers who, according to people familiar with the matter, oppose closing the carried-interest tax loopholes argued. In the run-up to last week’s deal, the senator and her staff have organized numerous face-to-face meetings with the industry, some of those familiar with those meetings said, asking not to be named to speak openly about private efforts to connect with Sinema to kick.
Since her election to the Senate in 2018, Sinema has had an open ear for the industry. Last September, she snuggled up for lunch at a Philadelphia restaurant with Michael Forman, CEO of Philadelphia-based investment firm FS Investments, who has at least $34 billion under management, and one of his executives, according to people familiar with the luncheon. Forman did not respond to emails and calls seeking comment.
“Every single big industry that doesn’t support what’s in there meets with Sinema, and it meets with everyone and everyone,” a lobbyist representing some of the world’s biggest investment firms told CNBC before Schumer announced late Thursday that Democrats agreed to drop the carried-interest rule in order to get her vote. Sinema said she will work separately to “pass carried-interest tax reforms.”
Private equity donor
Even before Sinema was elected to the Senate in 2018, she supported private equity investors as a member of the House of Representatives. In 2016, Sinema said the industry “provided billions of dollars to Main Street businesses every year,” according to The New York Times.
Sinema won a coveted seat on the powerful banking committee and quickly made work to network with — and fundraise from — the industry she would oversee. Since the start of the 2018 election cycle, she has raised at least $2 million from the securities and investment industry — surpassing the $770,000 in industry giving by Senate Banking Chair Sherrod Brown over the same period, according to Federal Election Commission data analyzed by bipartisan campaign finance watchdog OpenSecrets. Both Sinema and Brown, D-Ohio are running for re-election in 2024.
Sinema’s earnings include $10,000 in campaign contributions from the American Investment Council’s Political Action Committee, half of which was donated to her campaign after Maloney’s op-ed ran last year.
Employees of private equity firms Kohlberg Kravis Roberts, Carlyle Group and Apollo Global Management collectively donated more than $95,000 to Sinema from the 2018 election through the current 2022 election cycle, according to campaign finance data.
That includes donations totaling $11,600 from KKR co-founders Henry Kravis and George Roberts, according to Federal Election Commission filings. Records show that Carlyle’s and Apollo’s political action committees together donated $15,000 to Sinema’s re-election campaign.
KKR and Carlyle officials declined to comment. Apollo and Blackstone officials did not respond to requests for comment.
‘Hats off to the P/E lobby!’
The reason some of Wall Street’s wealthiest money managers want to keep the carried interest loophole is because it taxes their profits at a lower rate than ordinary income. Instead of paying the standard individual income tax rates of up to 37% for people making more than $539,900 ($647,850 for married couples filing jointly), carried interest is taxed at the capital gains rate, which is typically around 20% for people with high incomes Income lies with earners as long as the investment is held for at least three years.
Democrats wanted executives to hold those investments for at least five years to get the better course. The industry defends the carried-interest tax break, saying it helps attract investments that benefit small businesses. Critics say it’s just a massive tax break for the rich.
Lloyd Blankfein, the former CEO of Wall Street investment bank Goldman Sachs, sneered at the private equity industry on Twitter after the removal of the carried interest clause from the Inflation Reduction Act: “Hats off to the P/E lobby ! During budget crises, the highest-paid people still pay the lower capital gains tax on their earnings.”