As Congress considers raising taxes on private-equity and other financial firms, some House Republicans have teamed with Wall Street interests to stop the move, and Treasury Secretary Henry Paulson said he opposes pending legislation because it singles out a particular industry.
More than 70 lobbyists from the financial-services, real-estate and oil sectors met with lawmakers yesterday to launch the Coalition for the Freedom of American Investors and Retirees, an ad-hoc group opposing higher taxes on investment income.
The U.S. Chamber of Commerce will host a similar meeting for industry lobbyists to begin sharing information and plotting strategy.
The new alliances come as some firms have launched their own targeted lobbying campaigns. The chairman of the National Venture Capital Association, who previously was scheduled to go to Washington to talk about corporate-responsibility laws, made a trip to Capitol Hill to denounce the legislation.
Henry Kravis, chief of private-equity firm Kohlberg Kravis Roberts & Co., made the rounds to rally lawmakers against the so-called carried-interest bill, as well as legislation introduced in the Senate that would raise taxes on private-equity firms that go public. KKR last week announced its plans for an initial public offering.
Meanwhile, opponents of the legislation got a boost yesterday when the Bush administration weighed in. Mr. Paulson, speaking at The Wall Street Journal’s Deals and Deal Makers Conference at the New York Stock Exchange, warned Congress against dealing with the issue on a “piecemeal” basis. “This is not the approach that makes sense, to single out one industry and make policy around it,” he said.
White House spokesman Tony Snow said President Bush also opposes the effort to alter the tax rate.
The administration comments spurred Senate Finance committee aides to issue a bipartisan statement saying that “far from singling out one industry for punishment, we’re simply clarifying that private-equity firms and similar businesses should not receive special treatment in the tax code.”
The lobbyists aim to kill a proposal that would raise taxes on wealthy investment managers by requiring managers at certain private partnerships to pay ordinary income-tax rates of as much as 35% on the cuts of profits, known as carried interest in industry parlance, which is now taxed at the 15% capital-gains rate.
House Ways and Means Chairman Charles Rangel (D., N.Y.), Financial Services Chairman Barney Frank (D., Mass.) and other House Democrats introduced legislation last week that would raise taxes for managers of certain private-equity funds, venture capital firms and real-estate partnerships.
The top Democrat and Republican on the Senate Finance Committee are considering similar legislation and will hold a series of hearings on the matter in July. Supporters of the tax change, mostly Democrats, see the legislation as a great way to raise revenue to pay for other priorities, such as children’s health legislation or another one-year reprieve from the alternative minimum tax.
Though legislation has been under consideration by Democrats since they took control of Congress earlier this year, the rapid introduction of bills in the past two weeks caught the industry flat-footed.
The launch of the industry discussions is an important first step toward defeating the legislation. Building coalitions of like-minded interests is an element of approving or rejecting legislation on Capitol Hill.
That effort is already facing obstacles. For one, many Wall Street firms don’t plan to take an active role against the legislation because they don’t think it affects them.
“We’re following these developments, but mutual funds do not raise the same tax issues and so would not be impacted by the proposed legislation,” said Edward Giltenan, a spokesman for the Investment Company Institute, a Washington-based trade association for the mutual-fund industry.
Certain real-estate investment trusts, securities firms and big banks also are bypassed by the legislation. And lobbyists for the hedge-fund industry say the legislation may not deal hedge funds a major blow because most funds already pay the 35% tax rate on short-term capital gains on investments held less than one year.
The industry’s main Washington trade group, the Managed Funds Association, hasn’t taken an official stand on the issue, but lobbyists for the association are telling lawmakers they are opposed to it.
In the House, bill opponents are being marshaled by Rep. Eric Cantor (R., Va.), a member of Mr. Rangel’s tax-writing committee and a big recipient of campaign support from the financial-services industry. He hopes to portray the legislation as the first step by Democrats toward repealing the 15% rates on capital gains and dividends.
“I don’t think people realize how much this has become a proxy fight for the 15% capital-gains rate itself,” said David Hirschmann, the president of the capital-markets division of the U.S. Chamber of Commerce.
Mr. Cantor, who is the top vote-counter for Republicans in the House, could win votes from most Republican lawmakers if he successfully defines the issue as a fight over the capital-gains rate, which the Republican-controlled Congress approved and Mr. Bush signed into law in 2003.
“The strategy is to try to keep Republicans together in the House and pick off a few Democrats,” said Sam Geduldig, a lobbyist who has run similar coalitions for House Republicans.
In the Senate, the industry must convince lawmakers that the tax increase would stifle a vital engine of U.S. investment. Supporters of the measure say the legislation would close a tax loophole being exploited by wealthy people.
