Carried Interest

Carried Interest, Deficit Reduction and the Super Committee

Congress returned to Washington last week after a month-long recess that followed one of the most contentious political debates in recent memory – whether and how to raise the nation’s debt ceiling.  Republicans called for spending cuts to offset any increase in the nation’s debt limit. Many Democrats, including President Obama, called for measures to raise taxes to fund a portion of a long-term debt reduction deal.  Carried interest was near the top of their list.

President Obama restated his longtime support for a carried interest tax increase at a press conference on June 29 when he called for the elimination of tax breaks for “millionaires and billionaires…oil companies and hedge fund managers and corporate jet owners.”  Republicans, however, were unified in their opposition to any tax increases and stated that any deficit reduction measures consist of spending cuts, not tax increases.

At the eleventh hour, Democrats and Republicans reached an agreement to raise the debt ceiling in two installments.  The first increase was immediate and offset by spending cuts alone.  The second increase of is set to take place in 2012.  The exact amount of the increase is dependent on whether (1) Congress has passed a balanced budget constitutional amendment and has submitted such amendment to the state for ratification, or (2) Congress has passed and the president signed legislation reducing the deficit by a minimum of $1.2 trillion (over 10 years) reflecting the policy recommendations of a newly created “Super Committee,” a bipartisan and bicameral group of twelve lawmakers tasked with identifying an additional $1.2 to 1.5 trillion in savings.

All members of the Super Committee have said that everything is on the table.  The Super Committee will be looking at spending cuts and tax increases, including the carried interest tax provision, though Republicans have made clear their opposition to new taxes.  If the Super Committee does not approve a deficit reduction plan by November 23, 2011 or if both Houses of Congress do not approve the deficit reduction plan by December 23, 2011, the second debt ceiling increase would be paired with automatic spending cuts beginning in 2013, but no tax increases.

Congressman Jeb Hensarling (R-TX) and Senator Patty Murray (D-WA) are the new committee’s Co Chairs.  Democrats will also be represented by Senate Finance Chairman Max Baucus (D-MT), Senator John Kerry (D-MA), and Reps. James Clyburn (D-SC), Xavier Becerra (D-CA) and Chris Van Hollen (D-MD).  In addition to Rep. Hensarling, the Republican roster includes Senators Jon Kyl (R-AZ), Pat Toomey (R-PA) and Rob Portman (R-OH), as well as House Ways and Means Committee Chairman Dave Camp (R-MI), and Rep. Fred Upton (R-MI).

The PEGCC is actively opposing any changes to the taxation of carried interest and closely monitoring the actions of the Super Committee.  If we determine that the Super Committee is considering a carried interest provision, we will be in touch with information about how you and your firm can participate in the debate and make your voice heard.