The U.S. Senate, seeking revenue to fund jobs bills and other initiatives, is for the first time considering a House proposal that would more than double tax rates on executives at private equity firms, said Sen. Charles Schumer, D-N.Y.
The proposal, designed to raise $24.6 billion over a decade, would affect venture capitalists, managers of real estate partnerships, and hedge fund managers who make long-term investments. Passed by the House three times, most recently in December as part of a jobs bill, it hasn’t come to a vote in the Senate, where some Democrats have signaled they would oppose it.
Now, “it’s one of the things being considered,” said Mr. Schumer, who serves on the Senate Finance Committee.
Managers of investment partnerships typically are paid 2% of fund assets as an annual management fee and 20% of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit, known as carried interest, is treated at the capital gains rate, currently 15% and slated to rise to 20% in 2011.
The proposal would tax carried interest at ordinary income tax rates. The top ordinary rate is 35% and is scheduled to increase to 39.6% in 2011.
The Senate is under pressure from the Obama administration, which has twice sought higher taxes on carried interest in budget requests. Democrats in Congress need to tap new sources of revenue for any spending after the passage last month of $940 billion health-care bill.
“Our position on carried interest remains as it has been for three years: It is investment income and it should be taxed as a capital gain,” said Robert Stewart, a spokesman for the Private Equity Council, a Washington trade group representing firms such as Blackstone Group Inc.