Washington Update

The presidential election brought unprecedented attention to the private equity industry and came at a critical time, when lawmakers are deeply concerned about fiscal and tax policy. Our work in 2012 focused on explaining what private equity is, how it works and who it benefits. The PEGCC did this work with an eye towards 2013, when legislators are expected to look at tax reform and other fiscal issues. Our objective is to ensure that policymakers have accurate facts and information with which to craft good public policy, not just rhetoric from a political campaign.

The fiscal cliff, a cocktail of spending cuts known as the sequester and tax hikes, was averted in a last minute deal between the President and Congress. As part of the deal, the tax rate for individual filers making more than $400,000 and for joint filers making more than $450,000 went up to the rate of 39.6 percent. The capital gains rate, including carried interest, also increased 58 percent from 15 percent to 23.8 percent for those making more than $400,000/$450,000. The fiscal cliff deal delayed the sequester by two months to give Congress time to identify alternatives to the automatic, across the board spending cuts scheduled to go into effect.

Over the next three months, Congress and the President will face a series of decision points on various important fiscal matters. On March 1st, the sequester, agreed to in 2011, will become operative. Less than four weeks later, a spending package to fund the government for the remainder of the fiscal year, known as a continuing resolution, will need renewal to avoid a government shutdown. As part of the fiscal cliff deal, both Houses of Congress are required to pass budgets by April 15th in order to avert the deferral of pay for Members of Congress. Finally, on May 18th the debt limit waiver expires, and Congress and the President will need to act.

We anticipate there will be a lot of media attention surrounding the issue of carried interest as each of these legislative milestones approach. It is important to note, this attention does not necessarily reflect a change in any policy maker’s position on the carried interest issue. As part of our continuing efforts to educate policymakers about private equity, the PEGCC recently released a new explanatory “whiteboard” video on carried interest that was circulated to media and to key audiences on Capitol Hill. The video can be viewed by clicking here.

Despite all of the swirling rhetoric and publicity surrounding the issue, it is essential to remember several important factors. First, Republicans have repeatedly stated their opposition to additional tax increases on top of those they accepted in the fiscal cliff deal. Second, there are a growing number of Republicans that have come to accept the sequester as a vehicle to reduce government spending, eliminating the need to find revenue, such as carried interest, to reduce the deficit. Third, legislation raising revenues must originate in the House of Representatives. At this time, the House has shown no inclination or intention to advance any revenue legislation. Lastly, advocates of comprehensive tax reform, in particular the Chairmen of the House and Senate tax writing committees, would prefer to consider changes within a larger overhaul of the tax code.

We at the PEGCC will keep you informed of developments important to private equity and growth capital firms.

Steve Judge