WASHINGTON — An hour after Democrats unveiled their climate and tax bill, Washington lobbyists in the private equity industry have taken action.
With the Senate’s final vote on a major package approaching on Sunday, if added late, companies controlled by private investment funds would be subject to a law that was supposed to apply to large U.S. corporations. You will be subject to the new 15% corporate minimum tax.
But a last-minute mobilization of political muscle and a direct plea to Senator Kirsten Cinema, an Arizona Democrat who opposes tax increases and is sympathetic to private equity, caused the bill to be overthrown. This blitz was emblematic of the messy nature of tax policymaking and how policies intended to curb tax avoidance can create new carve-outs on the fly.
This problem is due to how private equity firms work. They typically invest in corporate portfolios. Under the terms at issue, if the combined “book income” of companies managed by the same private equity fund exceeds $1 billion, all of them, even small businesses, would be obligated to pay. will incur A new 15% tax on the income they report to shareholders.
“Someone seems to be sneaking past.” Neil Bradleythe chief policy officer of the U.S. Chamber of Commerce said on Twitter on Saturday.
freedom worksIt is a conservative organization that lobbyes for tax cuts.
Private equity trade groups have circulated a survey of opponents who said it would hit more than 18,000 companies for what they called a “stealth” tax.
At Ms. Cinema’s urging, the bill was removed after hours of horse trading over how to replace the estimated $35 billion in government revenue lost by canceling the proposal. Ultimately, the lawmaker chose to extend a rule Republicans enacted in her 2017 that limits the deductions companies can take for business losses.
The new minimum corporate tax had already been cut before the weekend changes. Cinema last week called for manufacturers to retain the deductions they use to offset the cost of purchasing equipment, and Congress maintained deductions for wireless spectrum purchases telecom companies said were critical to the deployment of high-speed broadband. decided to
What the climate, health and tax bills say
A big win for private equity lobbyists has been in so-called carry interests. Democrats have proposed curtailing special tax treatment of investment profits received as compensation by hedge fund managers and private equity executives. After Cinema objected, the effective interest limit was replaced with his 1% excise tax on corporate stock buybacks.
Tax experts were already skeptical about minimum corporate tax rates, saying businesses could avoid paying taxes on their own.
“The minimum tax rate has always been kind of the 10th best solution, but when you start pulling more factors out, does it become the 12th best solution?” Senior Fellow, Urban Brookings Center for Tax Policy Steven M. Rosenthal noted that relatively few businesses will face the new tax. “There may be more government employees dedicated to auditing these companies than there are taxable companies.”
The Joint Taxation Commission estimated that the new minimum corporate tax would apply to 150 companies, but that was before more exceptions were added to the law. The tax was projected to generate over $300 billion in new revenue for him over a decade, but a streamlined version could see him just over $200 billion.
“Either way, the problem remains that companies will be paying very little tax on this,” said Kyle Pommerlow, a senior fellow at the American Enterprise Institute.
Pomerlo also lamented that by taxing book income, Congress is delegating some tax policy to the Financial Accounting Standards Board, an independent body that sets accounting rules. Book revenue is the profit that a company reports to shareholders and investors on its income statement and is generally governed by these accounting rules.
The new tax aims to target big companies like Amazon and Meta. Over the years, these companies have found ways to use tax credits to lower their tax rates. Tax experts usually favor higher tax rates (the current corporate tax rate is 21%) or lower deductions. But Republicans opposed that approach, and Democrats didn’t get enough votes, so they settled for the minimum corporate tax rate.
Progressives expressed disappointment when Democrats backed out of measures that could affect companies controlled by private equity, accusing Mr. Cinema of being indebted to Wall Street and lobbyists. .
“After she loses her primary, they can’t pay her enough, no matter what job she gets on Wall Street.” Adam GreenCo-founder of the Progressive Change Campaign Committee wrote on Twitter:
The House passed the Senate bill this week, and President Biden plans to sign the bill soon thereafter. The tax changes are due to take effect next year, and the Treasury Department is rushing to develop regulations and guidance to interpret some of the laws.
In a tweet on Sunday, Cinema said he was proud of the outcome of the negotiations. She said it will spur innovation and job creation.
Marc Mazur, former assistant secretary for tax policy at the Treasury Department, said a corporate minimum tax was “not the best policy” and accounting firms have passed legislation to determine how clients can avoid the new tax. He said it was likely that he was combing through the
Mazur, who left the Treasury Department in October, said, “It’s tantamount to admitting that Congress can’t do the right thing, take back the tax cuts it’s been given, and has to do it through the back door. ‘ said.hold He has held senior positions in the federal government for nearly 30 years.
He predicted that companies would find new ways to lower their tax bills, saying, “There are options to do something, and at least we can expect aggressive taxpayers to consider those options.”
