How Private Equity Lobbying Diluted the Corporate Minimum Tax

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

With a final Senate vote on the main package on Sunday, a late addition would have subjected companies controlled by private investment funds to a new 15 percent corporate minimum tax in the legislation that was supposed to apply to the smallest corporations. great United States.

But a last-minute mobilization of political force and direct appeals to Sen. Kyrsten Sinema, the Arizona Democrat who opposes tax increases and is sympathetic to private equity, caused the measure to be scrapped. The blitz was emblematic of the messy nature of tax policymaking and how policies aimed at curbing tax evasion can spawn new exceptions down the road.

The problem stems from how private equity firms work: They typically invest in a portfolio of companies. Under the provision that was at issue, if the combined “accounting income” of companies controlled by the same private equity fund exceeded $1 billion, all of those companies, even if small or medium-sized, would be required to pay. the new 15 percent tax on the income they reported to their shareholders.

“Looks like someone is trying to sneak past everyone” neil bradleypolicy director for the US Chamber of Commerce, he said on Twitter on Saturday.

freedom worksa conservative organization that lobbies for lower taxes, issued warnings on its Twitter account, claiming that Democrats were targeting small businesses that rely on capital investment to expand.

Private equity industry groups circulated an opposition investigation into what they called a “stealth” tax, which they said would affect more than 18,000 companies.

At the urging of Ms. Sinema, the measure was scrapped after hours of haggling over how to replace an estimated $35 billion in government revenue that would be lost by not participating in the proposal. Lawmakers ultimately chose to extend a rule limiting the deductions businesses can take for business losses that Republicans enacted in 2017.

The new corporate minimum tax had already been lowered before the changes over the weekend. Ms Sinema pushed last week to preserve deductions that manufacturers use to offset the cost of equipment purchases, with lawmakers deciding to keep a deduction for wireless spectrum purchases that telcos said was important for rollout. high-speed broadband.

The big win for private equity lobbyists was so-called interest carried. Democrats had proposed curbing the special tax treatment hedge fund managers and private equity executives receive on investment earnings they earn as compensation. After Ms. Sinema objected, the cap on accrued interest was replaced with a 1 percent excise tax on corporate share buybacks.

Tax experts were already skeptical about the corporate minimum tax, saying companies could maneuver to pay it.

“The minimum tax has always been like the 10th best solution, and when you start removing more items, now it’s the 12th best solution?” said Steven M. Rosenthal, a 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 companies, but that was before more exceptions were added to the legislation. The tax was projected to raise more than $300 billion in new revenue over a decade, but the scaled-down version is likely to raise just over $200 billion.

“There’s still the problem that companies are going to end up paying too little tax anyway,” said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.

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

The new tax is intended for large companies, such as Amazon and Meta, that have for years found ways to lower their tax rates by capitalizing deductions in the tax code. Tax experts generally favor raising tax rates (the current corporate rate is 21 percent) or reducing deductions. But because Republicans were united against that approach and Democrats didn’t have enough votes in favor, they settled on the corporate minimum tax.

Progressives expressed disappointment after Democrats scrapped the measure that would have hurt private equity-controlled companies, accusing Sinema of being beholden to Wall Street and lobbyists.

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

The House is expected to pass the Senate bill this week, with President Biden signing it into law soon after. The tax changes would take effect next year, and the Treasury Department would rush to develop regulations and guidelines for interpreting parts of the law.

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

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

“It’s almost admitting that Congress can’t do the right thing and take back the tax breaks that were given, so it has to go through the back door,” 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 getting things done, and you can expect at least aggressive taxpayers to explore those options.”

Leave a Comment

Your email address will not be published.