How Private Equity Lobbying Watered Down the Corporate Minimum Tax

WASHINGTON — An hour after Democrats released the text of their climate and tax legislation, Washington lobbyists for the private equity industry are springing into action.

As the final Senate vote neared Sunday on the major package, a late addition would have subject corporations controlled by private equity funds to a new minimum corporate tax of 15% in legislation meant to apply to larger corporations. American companies.

But a last-minute mobilization of political muscle and direct appeals to Sen. Kyrsten Sinema, the Arizona Democrat who opposes tax increases and favors private equity, caused the measure to be scrapped. The blitz was emblematic of the messy nature of tax policymaking and how policies intended to tackle tax evasion can create new exclusions on the fly.

The problem stems from how private equity firms operate: they typically invest in a portfolio of companies. Under the provision that was the point of contention, if the combined “book income” of companies controlled by the same private equity fund exceeded $1 billion, all of those companies, no matter how small or medium-sized, would be required to pay the new 15% tax on the income they declare to their shareholders.

“Looks like someone is trying to sneak past everyone,” Neil Bradleydirector of policy at the United States Chamber of Commerce, said on Twitter on Saturday.

freedom worksa conservative organization that lobbies for lower taxes, issued warnings on its Twitter feed, saying Democrats were targeting small businesses that depend on capital investment to grow.

Private equity industry groups circulated opposition research on what they called a “stealth” tax, which they said would hit more than 18,000 businesses.

At Ms Sinema’s urging, the measure was scrapped after hours of haggling over how to replace an estimated $35 billion in government revenue that would be lost by withdrawing the proposal. Ultimately, lawmakers opted to expand a rule limiting the deductions companies can take on business losses that Republicans signed into law in 2017.

The new minimum corporate tax had already been cut before the weekend changes. Ms Sinema lobbied last week to preserve deductions that manufacturers use to offset the cost of equipment purchases, and lawmakers moved to retain a deduction for wireless spectrum purchases that telecom companies say was important for the deployment of high-speed broadband.

The big win for private equity lobbyists was on so-called carried interest. Democrats had proposed limiting the special tax treatment that hedge fund managers and private equity executives receive on the investment gains they receive as compensation. After Mrs. Sinema’s objection, the carry-over interest restriction was replaced by a 1% excise tax on company share buybacks.

Tax experts were already skeptical of the minimum corporate tax, saying businesses would be able to circumvent the payment.

“Minimum tax has always been like a 10th best solution, and when you start taking out more elements, is it now the 12th best solution?” said Steven M. Rosenthal, senior fellow at the Urban-Brookings Tax Policy Center, noting that relatively few businesses would now face the new tax. “There may be more government personnel dedicated to auditing these companies than there are companies subject to the tax.”

The Joint Committee on Taxation had estimated that the new minimum corporate tax would apply to 150 businesses, but that was before other exceptions were added to the legislation. The tax was expected to generate more than $300 billion in new revenue over a decade, but the lite version is expected to generate just over $200 billion.

“There remains the problem that companies are going to pay little tax anyway,” said Kyle Pomerleau, senior fellow at the American Enterprise Institute.

Pomerleau also lamented that by taxing accounting income, Congress cedes some control over tax policy to the Financial Accounting Standards Board, an independent organization that sets accounting rules. Accounting income is the profit that companies report to shareholders and investors in their income statements, which are generally governed by these accounting rules.

The new tax is intended to target large companies, like Amazon and Meta, which for years have found ways to lower their tax rates by capitalizing on tax code deductions. Tax experts generally favor raising tax rates – the current corporate rate is 21% – or reducing deductions. But because the Republicans were united against this approach and the Democrats did not have enough votes for it, they opted for the minimum corporate tax.

Progressives expressed disappointment after Democrats scrapped the measure that would have affected private equity-controlled firms and accused Ms Sinema of being beholden to Wall Street and lobbyists.

“Whatever job she gets on Wall Street after losing her primary, they can’t pay her enough,” green adamco-founder of the Progressive Change Campaign Committee, wrote on Twitter.

The House is expected to pass the Senate bill this week and President Biden will sign it shortly thereafter. The tax changes would go into effect next year, and the Treasury Department would race to develop regulations and guidelines to interpret parts of the law.

Ms Sinema said in a tweet on Sunday that she was proud of the outcome of the negotiations, which she said would spur innovation and job creation.

Mark Mazur, former deputy assistant secretary for tax policy at the Treasury Department, said the corporate minimum tax was “not the best policy” and accounting firms were likely reviewing legislation to determine how their clients could avoid the new levy.

“It’s almost an admission that Congress can’t do the right thing and claw back the tax breaks that have been given, and so it has to do it by stealth,” said Mazur, who left the Treasury Department in October and held senior positions in the federal government for nearly 30 years.

Predicting that businesses would find new ways to lower their tax bills, he added: “There are options for doing things, and you can expect the least aggressive taxpayers to explore those options.


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