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Fat Lady Arrives Backstage: House Passes Carried Interest Tax Hike

Three years after first threatening to do so, the House of Representatives today voted to change the tax treatment of carried interest. But before you despair or celebrate — depending on your ideological persuasion — please realize that this vote is kind of like the first goal of a hockey game. It matters, but there’s still a long way to go.

The next act takes place in the Senate, which is out for for recess until June 7 (I’m imagining McConnell and Reid scaling the monkey bars). Upon return, the deliberative ones may favor some very different language.

Specifically, some Blue Dog Democrats have been mumbling about the House bill being too punative on VC, PE, real estate and hedge fund managers (most Republicans are simply opposed to any change because, well, opposition is what they do best).

The House bill would change the tax treatment of carried interest from capital gains (15% today, 20% next year) to a hybrid of 25% capital gains and 75% ordinary income. This would be phased in over a three-year period, beginning in calendar 2011.

A possible Blue Dog proposal would be to make the mix a bit more equal — perhaps 60/40 instead of 75/25. This still won’t satisfy the financial services lobby (NVCA reply is hilariously hysterical), but it may be the type of compromise needed for passage. After all, even today’s House vote was a squeaker at 215-204.

So this long ride will last at least a couple more weeks. That’s ok. The VC/PE industry will still be around — whether or not it passes.