President Obama has proposed increasing the tax rate on carried interest from the long term capital gains tax rate to the ordinary income tax rate, and his proposed budget includes the benefits of this tax increase. According to officials within the administration, this contemplated tax increase would apply not only to hedge funds, but also to private equity and venture capital funds. See here.
We will keep you posted as we learn more.
From the New York Times: "some people think that a carried-interest tax increase could be put back on the table." See also this article in PEHUB.
What I haven't seen written about in the various tax articles that have been written recently is how state and local tax increases will affect contemplated federal tax hikes. Both California and New York City are considering income tax hikes. Since state and local income taxes are deductible for federal income tax purposes, if state and local governments across the country raise income taxes this could reduce the federal revenues expected to be derived from federal income tax hikes, which might necessitate higher federal income tax hikes than previously contemplated.
It would appear that everyone is expecting that this tax "break" or "loophole" will be closed.
There were a number of articles to this effect written today, including one in CNNMoney, and another at GlobeSt.com.
It will be crucial to the venture capital industry and the real estate industry that any modification to the tax law to take away the carried interest tax "break" for larger institutions (where there is perceived executive compensation excesses) does not inadvertently or intentionally capture venture capital and real estate partnerships as well.
We will keep you posted.
Bloomberg reported on August 3, 2007, that House Ways and Means Committee Chairman Charles Rangel said in an interview that he will combine the proposed carried interest tax increase with AMT reform in the fall. Combining these measures may increase the likelihood of passage of an increase on the tax on carried interest. Rangel is a co-sponsor of legislation to increase the tax on carried interest.
View text of the proposed legislation; here is the carried interest in pdf form.
View text of press release accompanying proposed legislation.
View fact sheet distributed with press release announcing proposed legislation.
For further information, please contact Joe Wallin, 206.757.8184, or joewallin@dwt.com.
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