June 5, 2023

Private equity lobbyists call it a tax code provision with nine lives.

Last week, when Democrats agreed to a tax-and-climate bill from Senate Democrats introduced by Sen. Kyrsten Sinema (D-Ariz.).

Carried interest income is what private equity and hedge fund managers receive when they sell their investments for profit. Income from such investments held for at least three years is taxed as long-term capital gains rather than the higher tax rate on ordinary income.

Senate Democrats want to let fund managers hold those investments for at least five years to get better rates — the latest in a series of attempts to change the law, which critics say is a loophole that benefits some of the wealthiest Americans.

The three presidents, including some business leaders including Donald Trump and Warren Buffett, have supported ending the preferential tax treatment for carried interest income. But most Republicans and some Democrats were not persuaded.

Taxation of carried interest became an issue after Victor Fleischer wrote a paper criticizing it as a loophole in the tax code.



Lobbyists in the private equity industry have struggled to maintain the status quo. They said they knew private equity had an image problem. So they’ve worked hard to convince lawmakers not to consider investment managers in New York and San Francisco, but local U.S. businesses they fund, such as medical practices, small manufacturers and auto repair businesses.

Private equity advocates say fund managers deserve lower tax rates because they help form the backbone of the economy.

“When an industry isn’t well understood or loved, you have to tell a story that your value proposition is necessary for economic growth,” said Republican strategist Ken Spain, who has linked interest tax changes to Fight for more than ten years.

The carried interest tax first became a political issue around 2007, when UCLA professor Victor Fleischer wrote a paper criticizing it as a loophole in the tax code. The paper caught the attention of lawmakers, then the House of Representatives. Sander Levin (D., Mich.) introduced legislation to end preferential treatment in the tax code.

At the time, private equity firms had no trade associations, few Washington lobbyists, and didn’t want to take the time to explain themselves to lawmakers.

KKR’s Ken Mehlman was among those who helped lead Washington’s early work.


GLG Getty Images

“When I got into the field, it felt like people were interested in having good tax policy,” said Mr. Fleischer, a former Senate Democratic aide who is now a professor of tax law at the University of California, Irvine. “Then the lobbying storm kicked in and there was a lot of pressure on members on both sides of the aisle.”

Major companies including KKR & Co.

Carlyle Group.


and Apollo Global Management company

Banded together to form a trade group initially known as the Private Equity Council. KKR’s head of public affairs, Ken Mehlman, was the campaign manager for then-President George W. Bush’s 2004 re-election, while Wayne Berman was the head of the Blackstone Group. , a lobbyist and adviser to several Republican presidential campaigns, who helped lead the effort.

The industry’s spending in Washington has soared. In 2006, private equity and other investment firms paid lobbyists $3.6 million. The following year, the label was about $20 million, similar to what it has seen in recent years, according to the nonpartisan Center for Responsive Politics.

Campaign contributions and independent political ad spending by these companies soared from $15 million in 2004 to $222 million in 2020, the Center’s analysis of campaign finance data shows.

Since she first ran for the Senate in 2017, Ms. Sinema was one of many lawmakers to receive donations, receiving about $2.3 million from securities and investment executives and industry political action committees, the center’s data shows.

In 2021 alone, Blackstone CEO Stephen Schwarzman will personally receive nearly $150 million in carried interest and incentive fees, securities filings show.


Jason Alden/Bloomberg News

Speaking at a fundraiser on Capitol Hill on Wednesday night, Ms. Sinema said she thought it would be foolish to change the tax treatment of carried interest because projects ranging from roads and bridges to semiconductor manufacturing rely on private equity.

While huge by Washington’s influence standards, political investment in the industry represents a small fraction of the amount involved. In 2021 alone, Blackstone CEO Stephen Schwarzman will personally receive nearly $150 million in carried interest and incentive fees, securities filings show.

As the 2008-09 financial crisis hit, the trade group realized that getting billionaire CEOs like Schwarzman to appear on Capitol Hill to defend their case was not a success, according to people familiar with the group’s thinking strategy. Instead, it began sending members of Congress on business trips to meet with executives running private equity-backed firms in their regions.

The organization has gradually added to its ranks more companies focused on investing in SMEs – it now has 106 members. In 2010, the Private Equity Committee changed its name to the Private Equity Growth Capital Committee to try to send a message to people that companies were driving the growth of the companies they acquired, not just cutting costs and laying off employees.

Hill’s outreach efforts paid off. An attempt to change the carried interest tax passed the House that year but stalled in the Senate due to opposition from a handful of senators. Among them is Sen. Susan Collins (R-Maine), who the industry has lobbied aggressively to win his support, according to people familiar with the matter.

Private equity received unwelcome attention in 2012 when Sen. Mitt Romney won the Republican presidential nomination to challenge then-President Barack Obama.


Eric Guy/The Associated Press

A few years later, when Sen. Mitt Romney (R., Utah), a former Bain Capital LP executive, challenged then-President Barack Obama in 2012, private equity thrown into the unwelcome spotlight.

With headlines accusing private equity firms of “spinning and flipping” businesses, Mr Obama slammed Romney for profiting from what he called a tax loophole.

“Mitt Romney’s 2012 candidacy was a major catalyst for the industry to step up its efforts in Washington,” said Mr. Spain, who at the time worked for a trade group in the private equity industry. Groups and individual companies focus their strategies on local projects funded by private equity.

In 2016, the trade group changed its name again, dropping the word “private equity” from its name. It also dropped the word “capital,” confusing some members of Congress, who thought it was referring to Capitol Hill, according to people familiar with the matter.

The newly named American Investment Council has its eyes on Donald Trump anxiously.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) also pledged to increase taxes on carried interest income, which the industry took notice when Trump took office in 2017.

The American Investment Committee, headed by former Speaker John Boehner’s chief of staff Mike Sommers at the time, began work.

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It organized a letter signed by about two dozen conservative House members pledging to reject any tax legislation that would include a substantial increase in the rate of income tax with interest.

“The industry has built a wall around this issue through clever lobbying,” said Sam Geduldig, then co-CEO of CGCN Group, a communications firm that works with the trade group.

Trump’s tax bill extends asset holding periods from one year to three years. Still, the industry sees it as a victory. An analysis by the American Investment Council determined that private equity firms hold roughly 80% of the companies they own for more than three years, allowing them to continue paying lower interest rates.

Drew Maloney, who worked on legislation under former Treasury Secretary Steven Mnuchin when he crafted Trump’s tax code, became a member of the American Investment Council in 2018 ) CEO.

Since President Biden took office, private equity firms have added lobbyists to the Democratic Party, which controls both chambers of Congress.

David Krone, chief of staff to former Majority Leader Harry Reid, joined Apollo in July 2021 as head of global public policy, serving as senior advisor to Majority Leader Chuck Schumer for five years and as managing director of government relations at Blackstone.

While Ms Sinema made clear her objections when she proposed changing carried interest on Capitol Hill last year, private equity is not taking a risk this time around.

Advertisements urging her to follow through have sprung up in Arizona over the past few weeks, with local private-equity-related business leaders calling her office. Washington lobbyists are in close contact with her office.

Still, lobbyists say it’s a close call.

“As long as I’ve been in Washington, there have been calls to permanently change carried interest,” said James Maloney, the trade group’s former public affairs director who still advises private equity firms. “We can expect similar changes to be put in another bill in the near term.”

Write to Miriam Gottfried at Miriam.Gottfried@wsj.com

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