Carry Tax Plays “Pay-Go” for AMT

House Ways and Means Committee Chairman Charlie Rangel (D-NY) has introduced legislation that would change the tax treatment of carried interest from capital gains to ordinary income. This is similar to legislation offered this past summer by Sandy Levin (D-MI), but with one giant difference: It would be tied to temporary abatement of the alternative minimum tax (AMT), which is scheduled to slam about 21 million households come April 15.

You can download the bill here: Bill.pdf

Rangel estimates that the tax change could generate as much as $46 billion in additional federal revenue, although only a minority of that would come from private equity managers. The rest would be generated from managers of partnerships involved in such things as timber, oil and gas and real estate (an expansion that will consequently expand legislative opposition).

Industry response has been swift and predictable. Both the Private Equity Council and National Venture Capital Association issued statements, which can be downloaded here: Private Equity Council president Doug Lowenstein issued a statement that can be downloaded here: PECstatement.doc NVCAStatement.doc

For those who don’t want to download, here’s a pair of excerpts. First, from PEC president Doug Lowenstein:

“The proposal would undo decades of established partnership tax law and create a new standard that  reserves capital gains rates only for those with the wherewithal to invest equity into an enterprise.  Meanwhile, those partners who invest their time and effort to add value to an asset they own – the very people who often are mainly responsible for any capital gains generated — would be taxed at ordinary rates.  We do not believe that is an equitable outcome.”

Now, from NVCA president Mark Heesen: “The U.S. has built an entrepreneurial ecosystem that is the envy of the world and we believe that the consequences of this legislation will be to penalize the very investors who are committed to growing our most critical innovative industries. We believe that seriously jeopardizing an investment model that works so well to create U.S. jobs and foster innovation is not the answer.”