A Democratic proposal to raise taxes on the private partnerships that are behind buyout mania on Wall Street has a good chance of passing because legislators plan to couple it with an extension of Alternative Minimum Tax relief — a combination President Bush would have a hard time vetoing.
The higher taxes would be imposed on private equity and hedge funds — and possibly real estate and other private partnerships — to generate as much as $80 billion in revenues that could pay for two years of relief from the Alternative Minimum Tax, or AMT, investment analysts estimate.
AMT relief under Republican-led Congresses was extended only one year at a time, raising the dilemma that a major new tax burden will be imposed next year on as many as 23 million taxpayers with incomes between $75,000 and $500,000. The tax applies to households that make heavy use of certain tax breaks such as tax-exempt bonds and child credits.
Analysts say the tax increase would be so large that it would imperil the economy, not to mention the political careers of legislators who allow it to happen.
House Ways and Means Committee Chairman Charles B. Rangel, New York Democrat, recently revealed his plan to couple the minimum-tax relief with a doubling of the tax on wealthy financial partnerships through legislation his committee will vote on next month.
“It’s the top priority,” he said, terming it an “inequity in the system” that must be rectified, and predicting it would be so popular in Congress that it might pass with a veto-proof margin. The Senate Finance Committee is also eyeing the proposal, where it was endorsed by ranking minority member Sen. Charles E. Grassley, Iowa Republican.
The measure would need to move quickly through Congress, analysts say, since AMT relief must be passed by the end of September to give the Internal Revenue Service time to create tax forms and carry it out.
Private equity funds announced more than $250 billion of acquisitions on Wall Street this year and enjoy unprecedented profits that are taxed at the capital-gains tax rate of 15 percent, compared with the 35 percent paid by corporations and wealthy individuals. The funds devised complicated procedures for compensating managing partners, specifically to ensure they pay the lowest possible tax rates.
Fund officials say they are well aware that the handsome profits they derive from acquiring company shares and then reselling them at higher prices after restructuring the companies, make them an attractive target for a revenue-hungry Congress.
The administration opposes the tax increase, which it contends would discourage entrepreneurship, but has not threatened a veto.
“We’re very, very hesitant about trying to target one aspect of limited partnerships for fear of the spillover it’ll have in affecting small business growth, and we don’t support that,” President Bush said recently. “Partnerships are an important vehicle to encourage investment and capital flow.”
Democrats are following a pattern of coupling desirable legislation with tax increases on popular targets, such as the wealthy, smokers and offshore corporations. Although President Bush vows to kill a farm bill and a child health care bill that are financed by tax increases, he acquiesced earlier this year to a bill erasing the tax advantages enjoyed by wealthy people who shelter their income through their teenage children. That bill was coupled with an increase in the minimum wage.
“I don’t think President Bush will be able to veto a bill that hurts a few rich people if it’s coupled with AMT relief that helps 23 million people,” said one equity-fund executive who asked to remain anonymous because his firm is officially opposed to the tax.
Sen. Charles E. Schumer, New York Democrat, is so concerned about the possibility of a major hit to financial firms in his state that he insists any tax increase be applied to all partnerships, including politically powerful real estate and farm partnerships. A tax increase limited to financial firms would not be large enough to pay for AMT relief, he pointed out.
One obstacle seems certain before the bill can clear Congress. Sen. Jim DeMint, the South Carolina Republican who led a coalition of conservatives that blocked an immigration bill in the Senate last month, said he will do his best to kill the tax proposal. Mr. DeMint could raise objections that might require a 60-vote majority to overcome, meaning Democrats will need to win Republican converts to pass the bill in the Senate.