WASHINGTON — An hour after Democrats released the text of their climate and tax legislation, Washington’s private equity industry lobbyists sprang into action.
With a final Senate vote on the big package on Sunday, a late addition would have subjected companies controlled by private investment funds to a new 15 percent minimum tax in the legislation that would apply to America’s largest companies.
But a last-minute mobilization of political strength and direct advocacy to Senator Kyrsten Sinema, the Arizona Democrat who opposes tax hikes and sympathizes with private equity, saw the measure scrapped. The blitz was symbolic of the messy nature of tax policy making and how policies intended to curb tax avoidance can create new carve-outs on the fly.
The problem stems from the way private equity firms operate: they typically invest in a portfolio of companies. Under the provision that was the point of contention, all those companies, even if they were small or medium-sized, would be liable if the combined “book revenues” of companies controlled by the same private equity fund exceeded $1 billion. the new 15 percent tax on the income they reported to their shareholders.
“Looks like someone is trying to sneak past everyone,” Neil Bradleysaid chief policy officer at the US Chamber of Commerce on Twitter on Saturday.
freedom worksa conservative organization that lobbies for lower taxes warned on its Twitter feed, claiming that Democrats were targeting small businesses that rely on capital investment to expand.
Private equity industry groups circulated opposition research into what they called a “stealth” tax, which they said would affect more than 18,000 companies.
At Ms Sinema’s urging, the measure was removed after hours of haggling over the replacement of an estimated $35 billion in government revenue that would be lost if the proposal were dropped. Ultimately, lawmakers chose to expand a rule that limits the deductions companies can take from business losses that Republicans introduced in 2017.
The new corporate tax rate had already been lowered before the changes over the weekend. Ms. Sinema last week pushed for the retention of deductions that manufacturers use to offset the cost of equipment purchases, and lawmakers decided to retain a deduction for wireless spectrum purchases that telecommunications companies say were important to the rollout of high-speed broadband. .
What’s in the Climate, Health and Tax Act
The big win for private equity lobbyists was the so-called carry rate. Democrats had proposed curtailing the special tax treatment hedge fund managers and private equity managers receive on the investment gains they receive as compensation. After Ms Sinema objected, the carry rate cap was replaced by a 1 percent excise tax on company share buybacks.
Tax experts were already skeptical about the corporate tax minimum, saying companies could maneuver to pay it.
“The minimum load has always been a 10th-best solution, and as you start removing more elements, is this now the 12th-best solution?” said Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, noting that relatively few companies are now faced with the new tax. “There may be more government personnel dedicated to controlling these companies than there are companies subject to the tax.”
The Joint Tax Commission had estimated that the new minimum corporate income tax would apply to 150 companies, but that was before more exceptions were added to the legislation. The tax is expected to bring in more than $300 billion in new revenue over a decade, but the slimmed-down version is likely to bring in just over $200 billion.
“There’s still the problem that companies will end up paying little tax anyway,” said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.
Mr. Pomerleau also complained that by taxing book income, Congress ceded some control over tax policy to the Financial Accounting Standards Board, an independent organization that sets accounting rules. Book income is the profit that companies report to shareholders and investors in their income statements, which are generally governed by those accounting rules.
The new tax is aimed at large companies, such as Amazon and Meta, that have for years found ways to lower their tax rates by taking advantage of deductions in the tax code. Tax experts are generally in favor of raising tax rates – the current corporate rate is 21 percent – or cutting deductions. But because the Republicans were united against that approach and the Democrats didn’t have enough votes for it, they decided on the minimum corporate tax.
Progressives expressed disappointment after Democrats removed the measure that would affect companies controlled by private equity, accusing Ms. Sinema of being dependent on Wall Street and lobbyists.
“Whatever job she gets at Wall Street after she loses her primaries, they can’t pay her enough,” he said. Adam Greenco-founder of the Progressive Change Campaign Committee, wrote on Twitter.
The House is expected to pass the Senate bill this week, and President Biden will sign it shortly after. The tax changes would come into effect next year and the Treasury Department would rush to develop regulations and guidelines to interpret parts of the law.
Ms Sinema said in a tweet on Sunday that she was proud of the outcome of the negotiations, which she said it would boost innovation and job creation.
Mark Mazur, a former deputy assistant secretary for tax policy at the Treasury Department, said the corporate tax minimum was “not the best policy” and that accounting firms were likely sifting 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 granted, and so it has to do it on a backdoor,” said Mr. Mazur, who left the Treasury Department in October and held leadership positions in the federal government for nearly 30 years.
Predicting that companies would find new ways to lower their tax bills, he added, “There are options for doing things, and you can at least expect aggressive taxpayers to explore those options.”
