Update: Carried Interest, Deficit Reduction and the Super Committee
With just one week until the November 23 deadline for the Joint Select Committee on Deficit Reduction (a.k.a. the Super Committee), we want to keep you informed of late breaking developments. Any deal reached by the Super Committee must be scored by the Congressional Budget Office (CBO), which could take 24-48 hours. Given this requirement, lawmakers face pressure to finalize details before their November 23 deadline. Of course, that is assuming a deal occurs.
As a result of the August debt ceiling agreement, Congress is tasked with identifying $1.2 trillion in deficit reduction over the next 10 years either through spending cuts, additional revenues or some combination of the two. Should the Super Committee fail to reach a bipartisan agreement, a series of automatic cuts (sequestration) will go into effect beginning in January 2013 to reach the intended target of $1.2 trillion. This is where the issue of carried interest comes in.
Over the past five years, the Private Equity Growth Capital Council has been battling proposals to increase the carried interest tax rate from the long-term capital gains rate of 15 percent to the ordinary income rate of 35 percent. While Republicans remain opposed to raising taxes, Democrats strongly believe that a deficit reduction deal must couple spending cuts with tax increases. This fundamental disagreement has resulted in an impasse and has increased skepticism that the Super Committee can reach an agreement to avoid sequestration.
The PEGCC has taken an aggressive approach in opposing a carried interest tax hike and has spent the last two months meeting with Super Committee members and staff. We have engaged portfolio company CEOs, grassroots activists and supporters in key states, and have swiftly and aggressively engaged the media on both a national and local level with a great degree of success.
Our message to the committee is simple: At a time when Congress should be encouraging long-term investment to create and grow companies, more than doubling tax rates on carried interest and enterprise value would only discourage further investment. To the extent that policy makers would like to debate appropriate tax rates on long-term capital gains, including carried interest and enterprise value, that is a topic more appropriately discussed within the context of fundamental tax reform.
In Washington, it is always darkest before the dawn, and agreements on major pieces of legislation like this one often occur at the 11th hour. Until the Super Committee reaches a consensus, carried interest remains at risk. From what we are told, the issue remains a topic of discussion within the Super Committee. Given the current populist political environment as evidenced by the “Occupy Wall Street” protests and the emerging likelihood that Mitt Romney will become the Republican presidential nominee, nothing can be taken for granted. What is playing out in the Super Committee is a preview of the larger 2012 political narrative, which means issues like carried interest, fundamental tax reform and possibly the private equity industry itself will remain involved in the political debate over the next year.
As we receive more information about developments within the Super Committee we will keep you updated. Please keep an eye on your inbox in the coming days.
