Capitol Hill Update

The presidential election continues to bring unprecedented attention to private equity.  Never has it been more important for private equity to explain to policy makers in Washington what private equity does, how private equity works, and who private equity benefits.

In the past three months alone, President Obama’s campaign and allied groups have spent nearly $25 million for almost 50,000 television spots, focused in a few swing states, about Bain Capital and private equity.  This persistent Bain-related advertising has kept an anti-private equity narrative alive as the electorate prepares to vote.

It is likely that the presidential race will remain very close through Election Day.  Most observers believe the race will be decided in a small number of swing states including Ohio, Florida, Virginia, Colorado and Wisconsin.  It is possible that party control of the House and Senate will not change.  While the leadership may not change, both legislative chambers may be more closely divided after the election.  This means that one of two things will likely happen: Congress will become even more polarized and nothing will happen until external events force a hasty resolution to our fiscal situation or leadership of both parties will respond to the growing concern about long-term fiscal problems and move towards some form of “Grand Bargain” negotiations at some point this year or next.  Either way, issues important to private equity will remain in the debate and the PEGCC will remain fully engaged.

Before the election, we expect Congress and the President to formalize an agreement on a six-month Continuing Resolution to fund the activities of the federal government through March 2013.  Assuming that this takes place in the next two weeks, the scope of the lame duck session of Congress after the election will be somewhat scaled back, but still extremely important.  The lame duck session will bring several big picture tax, spending sequester, and debt limit issues to a head.  On January 1, 2013, the country is scheduled to undergo enormous policy shifts automatically.  At the stroke of midnight — and in the absence of Congressional and Administration action — all of the 2001/2003 tax cuts are set to expire; large, automatic cuts to the defense budget, Medicare providers, and other domestic programs are set to kick in; and (most likely) the payroll tax cut will end. Around the same time, the country will once again run out of borrowing authority.

Many Democrats and many Republicans do not want this dramatic “Fiscal Cliff” scenario to unfold, but both parties still disagree about the alternatives.  It is unclear how the election results may change the short-term dynamics surrounding this challenge.  While it is possible that both sides will agree to some form of “punt” on major tax, debt limit, and spending sequester issues into next year, this result is far from guaranteed at this point.  In this environment, it remains essential for the PEGCC to work to ensure that carried interest does not become collateral damage in the end of the year drama.

The upcoming comprehensive tax reform debate and the focus on private equity in the presidential campaign also continues to highlight three major tax policy issues at risk for private equity: (1) the tax treatment of carried interest; (2) proposals to limit interest deductibility; and (3) proposals to impose an entity level tax on pass-through businesses.  The PEGCC continues to advocate actively on all three of these issues to lay the groundwork for effective involvement during the lame duck session of Congress and when comprehensive tax reform discussions proceed in 2013.