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House passes tax relief, hits private equity
November 9, 2007 / 7:29 PM / 10 years ago

House passes tax relief, hits private equity

WASHINGTON (Reuters) - The House of Representatives on Friday passed a bill to prevent millions of middle-income Americans from being caught by a tax meant for the very wealthy, and partly paid for the relief by raising taxes on rich private equity fund managers.

The House voted 216-193, mostly along party lines, for the bill, which would ensure that about 20 million taxpayers do not pay the alternative minimum tax when they file their 2007 income tax returns early next year. No Republicans supported the bill and eight Democrats broke with their party leaders and voted against it.

Republicans opposed the bill because it also included a provision that would require private equity fund managers to pay regular income taxes, of as much as 35 percent, on their earnings, instead of the current 15 percent capital gains tax rate they now pay.

The $78 billion bill now goes to the Senate where provisions raising taxes on private equity managers face even stiffer opposition. The White House opposes raising taxes on the financiers and said President George W. Bush would veto the bill if it goes to him with the revenue-raising provision.

Lawmakers are under pressure to act quickly on the alternative minimum tax relief. The tax was first enacted in 1969 to ensure the very wealthy did not take advantage of so many tax breaks that they paid no taxes at all. But because of inflation the tax now looms over more middle income people.

Full repeal would be costly to the federal treasury, about $800 billion over 10 years, and Congress has been enacting a series of temporary relief bills to hide the budget impact.

If lawmakers fail to act soon, about 20 million taxpayers could be hit with the tax when they file their 2007 income tax returns starting in January.

Treasury Secretary Henry Paulson said he was concerned that federal tax refunds to millions of taxpayers could be delayed because Congress waited so long to act on the AMT issue.

“I urge Congress to enact one-year AMT relief without raising taxes as quickly as possible so the IRS can adjust and complete its preparations for the upcoming filing season with the least possible delays and confusion for taxpayers,” Paulson said in a statement.

NEW TAX OR CLOSING LOOPHOLE?

Republicans argued that Congress should abandon rules that require any tax cut to be paid for by other revenue increases since middle income earners were never meant to pay the alternative minimum tax.

Rep. David Dreier, a California Republican, said it was “absolute lunacy” to adhere to the pay-as-you-go rule on the alternative minimum tax.

The bill would also limit the ability of hedge fund managers to defer income, and taxes on it, through offshore tax havens. It also would extend a number of popular business tax breaks including the research and development tax credit.

Democrats said they did not want to add to the nation’s mounting debt, which reached $9 trillion this week, and that changing the rules for private equity fund partnerships was a matter of fairness.

“Who in the world would believe that it’s fair for corporations and partnerships to be doing the same work ... except one pays 15 percent because they have created in their imagination that their work is really capital when they take no risk, and the others get 35 percent?” said House Ways and Means Committee Chairman Charles Rangel, a New York Democrat.

“Fairness dictates this is not a tax increase, this is a closing of a loophole,” said Rangel.

Senate Finance Committee Chairman Max Baucus said he would move a bill quickly. The Montana Democrat has acknowledged in the past that it would be difficult to move a bill through the Senate that raises taxes on private equity fund managers, but has promised to fix the alternative minimum tax problem.

“Millions of American families are counting on us to act, and we will,” Baucus said in a statement on Friday.

The Private Equity Council, which represents many wealthy fund managers, said it would fight any tax increase that could “dampen economic growth at a time of an unsettled economy and gyrating financial markets.”

Additional reporting by Kevin Drawbaugh; Editing by Gary Hill

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