Tax Fairness Advocates Fire Back at Lobbyists for Investment Managers
Members of Congress returning
to Washington this week were greeted with a call from over three hundred non-profits, unions, and faith-based groups to end the "carried interest" tax loophole that
vastly reduces the tax bills of certain millionaires and billionaires in
the investment industry.
Legislation (H.R. 2834) proposed by Rep. Sander Levin (D-MI) would eliminate this loophole. Several progressive national organizations and unions have begun their own lobbying campaigns in support of the Levin bill.
A letter applauding
the Levin bill was signed by the 300 groups from every state and was sent to members of Congress earlier this week. The letter argues that "it's
an outrage that Americans who are paid millions or even billions for their
labor can be subject to lower federal tax rates than their middle-income
receptionists."
General partners in private
equity funds and other types of funds invest other people's money and are often paid huge sums for their services. Part of this pay is in the form of "carried interest," which is a share of profits. The loophole allows the general partners to pay the low, 15 percent rate for capital gains on their carried interest, even though they have not contributed capital and do not own the
capital assets.
Private Equity Industry Working Hard to Defend the Indefensible
Lobbyists from the private equity industry descended upon House and Senate offices as soon as the Levin bill was introduced. The industry has produced a bewildering variety of arguments, often contradicting themselves, to defend this loophole over the past several months. This pattern continued on Thursday, when the Senate Finance Committee held its third hearing on the issue and the House Ways and Means Committee held a day-long hearing on
tax fairness issues, including the carried interest loophole.
Representatives for the
private equity industry have at times argued that they are developing companies
through
their hard work, implying that they deserve a tax break for this reason. At other times they have argued that their carried interest is not pay for work, to justify being taxed as if they have capital gains. They have at times argued that pensioners will suffer if the loophole is closed because the fund managers will find the tax increase so odious that they will no longer have an incentive to provide investment management services to pension funds. At other times they have argued that they'll just pass the tax increase onto pensioners and other investors, which would suggest that they won't
find anything at all odious about the tax increase and that they should be
indifferent to it.
Public employee pensions, which often invest a small portion of their assets in private equity, have generally not joined the private equity industry's side in this debate.
One novel argument made
by the industry is that the carried interest loophole helps African-American and ethnic minorities accumulate
assets. It's difficult to imagine how this argument could be effective. Three of the co-sponsors for the Levin bill are members of the Congressional Black Caucus, including Ways and Means chairman Charles Rangel. Chairman
Rangel hopes to make legislation to close the carried interest loophole,
and possibly other unnecessary tax loopholes, part of a larger bill that
would reform the Alternative Minimum Tax.
Countdown to Chaos in Michigan
Michigan faces
a massive budget shortfall of as much as $1.8 billion. Almost everyone agrees that something needs to be done to correct the situation, but the agreement ends there. A large coalition of "agencies representing universities, schools, police, fire, children, low-income residents, public employee labor unions and others" is worried
that the projected fiscal crunch will necessitate massive cuts in public services and is
advocating a tax increase. This would most likely take the form of
a one-percent income tax increase or sales tax base expansion to help alleviate
the projected shortfall. However, another group, the
so-called Michigan Taxpayer's Alliance, has pledged to fight against any
and all revenue enhancements to fix the problem. They maintain that the proper response is drastic cuts in spending, which they claim will be better for the state economy. The group has even
outrageously threatened to attempt to recall any
politicians who vote for any solution that includes a tax increase.
There is no reason for politicians to be moved by the anti-tax radicals. Local union leaders have pledged their support to politicians facing recall threats. State Rep. Mary Valentine, one of the lawmakers faced with a potential recall has pledged not to let the threat influence her decision, saying of the recall effort's leader, "He wants to intimidate people to do what he wants rather than what is best for my district[…]
I will do what is best to do for my district." Michigan's
fiscal future remains in doubt, but state residents can take heart that
some lawmakers seem willing to stand up to right-wing demagoguery.
Can a Tax Proposal Be Described in 13 Words?
The latest weapon for
people who believe in making it as difficult as possible to invest in the
public good is rearing its ugly head in Washington State.
Initiative 960 would change the state constitution to require two-thirds
approval in both state houses, or voter approval, for all tax increases.
The initiative would also broaden the definition of a "tax increase" to include "any action or combination of actions by the legislature that increases state tax revenue deposited in any fund, budget, or account." In a bizarre twist, any revenue change that was not approved by the people would earn a spot on the ballot - allowing voters to have their say in a non-binding advisory capacity. The description of these complex fiscal proposals in voter pamphlets would be limited to 13 words! For
more on this confusing and harmful initiative, take a look at this report from the Washington State Budget and Policy Center.
Cloudy Skies in California Will Persist
Despite Budget Agreement
On August 24, California Governor
Arnold Schwarzenegger signed into law the state's contentious 2007
budget (which
was nearly 2 months overdue). It's especially difficult to pass a budget in the Golden State because a supermajority is required for passage. In order to gain the two-thirds majority needed in the Senate, the Governor committed to slashing $703 million in spending through his line-item veto power. The
California Budget Project reveals that
about 75 percent of the vetoes came directly from Health and Human Service programs. And there's no reason to think these problems will go away on their own. The Legislative
Analyst's Office predicts a
shortfall of $5 billion for next year and the year after that.
Illinoink?
After weeks of angst, political bickering, and general upheaval, Illinois Governor
Rod Blagojevich recently signed a budget bill for Fiscal Year 2008. Controversy
had not died by the time of the signing, and the Governor line-item vetoed nearly $500 million in so-called "pork" projects.
But the Center on Tax and Budget Accountability examined the projects in question and found the state's budget was not really laden with pork. Its report concluded that "it
does not appear necessary to change the state's name to 'Illinoink'."
Challenges of Change... You Got That Right
As we've told you in past Digests,
some Indiana taxpayers are threatening a revolt over property taxes. Rather than considering constructive reforms to the property tax, some anti-tax zealots are using the current situation as a reason to call for its outright elimination. Last week members of the Commission on State Tax and Financing Policy heard about the impact that property tax repeal would have on the state. The
Legislative Services Agency (LSA) rightly titled their presentation "Challenges of Change."
The
LSA estimates that in order to replace the $6.1 billion Indiana property
taxes currently bring in, lawmakers would have to either increase the state income tax rate from 3.4 to 9 percent, or hike the sales tax rate from 6 percent to a whopping 13.2 percent. The LSA's presentation shows that repealing all Indiana property taxes would be prohibitively expensive. While Indianans' angst over their rising property tax bills is understandable--property taxes are regressive, and are often not based on a homeowner's ability to pay them-- enacting targeted property tax reforms such as a low-income "circuit breaker" credit
would allow local governments to retain this important revenue source,
and would make Indiana property taxes less unfair without requiring
a double-digit sales tax to pay for it.
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