A group of Senate Democrats reintroduced legislation that would raise taxes on hedge fund and private equity managers’ income.
Sens. Sherrod Brown, D-Ohio, Tammy Baldwin, D-Wis., and Joe Manchin, D-W.Va., introduced the Carried Interest Fairness Act of 2024 on April 15 with the support of 11 other senators, including Sens. Elizabeth Warren, D-Mass., Bernie Sanders, I-Vt., and Cory Booker, D-N.J.
Brown, Baldwin and Manchin introduced the same bill back in 2021, but it never moved.
The bill would require carried interest — income earned by general partners of a private equity, venture capital or hedge fund — to be taxed at ordinary income tax rates of up to 40.8%, rather than at its current rate of 23.8%, according to a fact sheet from Baldwin’s office.
Right now, carried interest on investments held longer than three years is subject to a 20% capital gains tax, plus 3.8% in net investment income tax, according to the Tax Policy Center.
The senators called this a “loophole” in the tax code.
“This loophole is yet another way wealthy special interests have rigged the system to work for them, at the expense of everyone else,” said Brown, who chairs the Senate Banking Committee, in a news release. “Hedge funds and private equity firms shouldn’t pay less taxes than working people in Ohio.”
“By closing the carried interest loophole, we’ll make our tax code fairer for working families, cut the deficit, and ensure that those at the top of the food chain aren’t exploiting the system to further enrich themselves,” Baldwin said in the news release.
Manchin contended the legislation would “ensure the wealthiest Americans are paying their fair share and contributing to our national economic growth rather than just their personal pockets,” according to the release.
President Joe Biden included a similar provision in his budget request for fiscal year 2025, proposing that a partner’s share of income in an investment services partnership be taxed at ordinary rates, according to the bill fact sheet.
The bill is supported by the AFL-CIO, American Federation of State County and Municipal Employees, Americans for Tax Fairness, Public Citizen, Economic Policy Institute and several other organizations, though those representing the alternative investment industry had differing opinions.
“Instead of attacking private equity for political purposes, Washington policymakers should focus on supporting investment that fuels small businesses, supports millions of jobs, and strengthens pensions across our country,” said Drew Maloney, president and CEO of the American Investment Council, an advocacy group for the private equity industry, in a statement.
“The basis on which carried interest is taxed is long-standing and reflects the recipients’ participation in the fund,” said Paul Hale, managing director and global head of tax affairs at the Alternative Investment Management Association, in a separate statement. “It is also consistent with the tax treatment afforded to carried interest in other jurisdictions.”
“As always, changes to the tax system are a policy matter for legislators to reach a decision upon, taking all factors into account,” he added.
Bryan Corbett, president and CEO of MFA, formerly known as the Managed Funds Association, said in his own statement that the bill "would harm American businesses, capital markets, and the U.S. economy. It will discourage long-term investments, raise the cost of capital, and reduce economic competitiveness."
"Carried interest is a capital gain and encourages high-value, long-term investments that allow businesses to grow in all 50 states," Corbett added.
Targeting carried interest is something lawmakers in Washington have done for many years.
A 2017 bill, which Republicans passed and former President Donald Trump signed into law, first instituted the requirement for fund managers to hold investments for three years, rather than one, to qualify for the reduced tax rate.
Then, in 2022, an early version of the Inflation Reduction Act included a provision to further extend that time period to five years and adjust when the hold period begins, though lawmakers ultimately excluded the provision from the final version of the bill.
