Senate Reconciliation Bill Would Close Carried Interest Loophole. What It Means for Private Equity.

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In a surprise, Senate Democrats reached a deal on a bill late Wednesday that could have a huge effect on private-equity firms. 

Sen. Joe Manchin, D-W.Va. is now supporting a bill, the Inflation Reduction Act of 2022, that aims to address climate change, as well as cut the cost of health insurance and prescription drugs. It also plans to close the so-called “carried interest loophole.”

That provision lets private-equity firms pay lower tax rates. Currently, managers of alternative investment partnerships enjoy a tax-advantaged treatment on their performance pay, or carried interest, which is typically set at 20% of the returns they generate for their investors. Because carried interest is taxed at the 20% capital-gains rate rather than ordinary income rates of up to 37%, investment managers pay lower rates than many wage earners, Barron’s has reported. 

Shares of

Blackstone

(ticker: BX) were down 0.4% in pre-market trading Thursday, while

Apollo Global Management

(APO) was off by about 24 cents.

Carlyle Group

(CG) and

KKR

(KKR) were off by 1% and 0.5%, respectively.

The American Investment Council, a lobbying group for the private-equity industry, opposes eliminating the provision. “Over 74% of private equity investment went to small businesses last year. As small business owners face rising costs and our economy faces serious headwinds, Washington should not move forward with a new tax on the private capital that is helping local employers survive and grow,” said Drew Maloney, the group’s president and CEO.

Every president since George W. Bush has tried to close the loophole but failed. This time around, Sen. Manchin reversed his opposition to the bill and joined with Senate Majority Leader Chuck Schumer (D-NY) to support the bill, which will treat carried interest as regular income and tax it at a higher rate. The bill aims to raise $14 billion by closing the loophole. 

“Our tax code should not favor red state or blue state elites with loopholes like SALT and should focus more on closing unfair loopholes like carried interest. Through the enforcement of a fair tax code, we can use the revenue to cut the deficit and lower the cost of healthcare for working families and small businesses,” Manchin said in a statement. 

The full Senate is expected to consider the bill next week, according to a joint statement from Schumer and Manchin.

Write to Luisa Beltran at [email protected]