House Passes Legislation That Would Increase the Taxation of Carried Interest Income
June 26, 2008
The Foley Adviser - June 26, 2008
By a vote of 233 – 189, the House of Representatives approved on June 25 amendments to the Internal Revenue Code that would tax carried interests at ordinary income rates. This change was one of several “offsets” included in the Alternative Minimum Tax Relief Act of 2008 (H.R. 6275). Other offsets include curbing the Code section 199 deduction for oil and gas companies and requiring information reporting for credit card reimbursements.
The increased taxation of carried interests is projected to raise $30.98 billion over the next ten years and accounts for half of the total amount of revenue that H.R. 6275 would likely raise if passed into law.
Critics claim that the change would directly or indirectly impact over 15.5 million partners invested in 2.5 million partnerships, in addition to the wealthy hedge fund executives targeted by the bill. These critics add that this broad reach would have widespread impact on capital formation and investment flows.
Supporters claim that carried interests represent a form of compensation paid to hedge fund managers in return for their investment services. While most taxpayers pay tax at ordinary income rates on income received for the performance of their services, a significant portion of much carried interest income is capital gain taxed at lower rates. These supporters claim that increasing the taxation of carried interest income eliminates what they claim is an unfair discrepancy.
Senate Republicans remain strongly opposed to such revenue raising provisions. In addition, the White House has indicated that it will veto any legislation that increases taxes.
Increasing the taxation of carried interest income has been included in previously proposed legislation, such as the AMT Relief Act of 2007 (H.R. 4351) proposed by Sen. Charles Rangel (D-N.Y.) in early December 2007. This legislation was successfully opposed by Senate Republicans. A one-year AMT patch that included no revenue raising provisions (H.R. 3996) was signed into law in late December 2007.
While the prospects of H.R. 6725 remain unclear in the face of opposition from Senate Republicans and the White House, it remains possible that increased taxation of carried interest income could be included in future legislation that does not face the same degree of opposition.