New Effort To Abolish Carried Interest Tax Break Begins In Congress
A bill to do away with a tax break that has been in the crosshairs of reformers for years has been introduced in the U.S. House of Representatives.
Derided by critics as a loophole, the tax break, known as carried interest, which benefits equity fund managers but also partnerships that own commercial real estate, has remained part of the tax code since 1954.
Under the Carried Interest Fairness Act of 2021 (H.R. 1068), the share of a private fund or partnership's profits that is paid to managers as part of their compensation, or carried interest, would be taxed as ordinary income at a rate of as much as 37%. Under existing tax law, it is taxed at the lower capital gains rate, a maximum of 23.8%.
"Our system [has] always been based on the principle that we ask more from those who have more," Rep. Bill Pascrell Jr., a Democrat from New Jersey, said in a statement. "The carried interest loophole has allowed private equity tycoons to pay lower tax rates than their secretaries. ... This loophole has survived too long and we are going to push hard to see that it is finally closed.”
Pascrell, who is chairman of the House Ways and Means Subcommittee on Oversight, is one of the sponsors of the bill, along with Reps. Andy Levin, a Michigan Democrat, and Katie Porter, a Democrat from California. Pascrell introduced a similar bill in 2019 to eliminate the carried interest tax break that fizzled out after its introduction.
During the 2020 presidential campaign, then-candidate Joe Biden didn't emphasize doing away with carried interest, but he was known to be sympathetic to the idea, Urban Institute fellow and Director of Economic Policy Initiatives Donald Marron told Bisnow.
The prospect of rising taxes under the Biden administration, including treating carried interest as ordinary income, is a serious concern among real estate professionals, according to a Bisnow survey conducted soon after the election. Some 29% of respondents said changes to carried interest, probate taxes and other tax breaks could have the biggest impact on commercial real estate.
As a measure that affects federal revenue, a change to the tax code like H.R. 1068 could pass the U.S. Senate without being stalled by a filibuster.
Commercial real estate organizations have long been against abolishing carried interest. The Real Estate Roundtable asserts that taxing real estate partnership income as regular income would represent a disincentive to real estate investment and development.
"It would discourage risk taking that drives job creation and economic growth," the organization states in one of its policy papers. "In short, it would have profound unintended consequences for main streets of cities and towns all across our country."