Battle Only Beginning Over the "Carried Interest" Tax Loophole for Billionaire Fund Managers

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On Tuesday, the Washington Post created a great deal of confusion by reporting that Senate Majority Leader Harry Reid (D-NV) has told lawmakers and lobbyists that the Senate will not have time this year to consider legislation eliminating the "carried interest" loophole, which allows billionaire fund managers to pay a lower tax rate than their middle-income receptionists. This was seen in some quarters as an indication that the issue is dead for this year, provoking several editorials blasting the Senate Democrats for choosing campaign contributions from lobbyists over tax fairness. The reality is that whether the Senate addresses the carried interest issue is largely up to the Senate Finance Committee, not Senator Reid.

Carried Interest Issue Wound Up in Debate Over Alternative Minimum Tax

Whether or not the Senate is unduly influenced by lobbyists is certainly a question worthy of debate, but some clarification is in order. It's true that the Senate is not likely to consider a stand-alone bill that does nothing but close the carried interest loophole. But every member of Congress already knows that. No one in Congress is talking about a stand-alone bill. The question everyone is considering is whether or not a provision to close the loophole should be used to offset the cost of other legislation Congress wants to pass. For example, Congress needs to pass a bill to keep the Alternative Minimum Tax (AMT) from affecting more taxpayers.

The number of people affected by the AMT will increase from around four million last year to 23 million this year if Congress does not act, and just fixing the AMT for this year alone would cost over $50 billion since Congress and the administration have always assumed that this revenue would be collected. A provision closing the carried interest loophole would raise some revenue (although an official estimate has not yet been made) and could therefore be used to offset part of the cost of dealing with the AMT. Over in the House, Ways and Means Chairman Charles Rangel (D-NY) has long said that he will likely try to close the loophole to help offset the cost of fixing the AMT.

Ball Is in the Finance Committee's Court

What types of "offsets" are attached to an AMT bill in the Senate is not decided by Senator Reid. It's decided by the Senate Finance Committee, and Finance Chairman Max Baucus (D-MT) has not yet said whether or not he'll include a provision to close the carried interest loophole. But he and ranking member Charles Grassley (R-IA) have both shown interest. An AMT bill needs to include offsets now that Congress operates under pay-as-you-go (PAYGO) rules that prevent it from increasing the budget deficit. Once the Finance Committee approves an AMT bill and sends it to the full Senate, Senator Reid will make time for a floor vote, since it will shield over 20 million families with voting members from an increase in their Alternative Minimum Tax.

Carried Interest Issue Won't Die Regardless of What Happens This Year

Regardless of what happens this year, there's enough public anger over the carried interest loophole to keep the issue alive for some time. Presidential candidates Hillary Clinton, John Edwards and Barack Obama have come out in favor of eliminating the loophole. Edwards and Obama even made a point of expressing their outrage that the issue hasn't been resolved by now. Even a chief lobbyist for the private equity industry said Wednesday that "It's not over; it's only just beginning."

For now, all eyes should be on the members of the Senate Finance Committee, particularly its chairman, Max Baucus.

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