(Original Post)
The Hill
February 26, 2009 Thursday
Obama, Senate Dems are divided on taxes
By Alexander Bolton
Pg. 3
A proposal expected in President Obama's budget to raise tax rates on hedge funds and private equity partners sets up another clash with Senate Democrats over taxes. Obama largely won the first disagreement, with Democrats on the Senate Finance Committee, over his plan to adjust tax rates for middle-income earners, saving individuals up to $400 and couples up to $800. But Obama's call to raise the tax rate on hedge funds and private equity groups targets a powerful industry that has given millions to Democratic coffers. It would also affect an important constituency for lawmakers who represent states where the finance industry wields clout, such as New York and Massachusetts - including Democratic Sens. Charles Schumer (N.Y.) and John Kerry (Mass.). "It was definitely the case that we heard Democrats on the Finance Committee expressing hesitation about supporting it," said Steve Wamhoff, legislative director of Citizens for Tax Justice, who worked on the issue when the Senate last considered the tax proposal in 2007. "Listening to Democrats on the Finance Committee, there was a question of whether it could pass out of the committee."
Hedge funds gave almost $11 million to federal Democratic candidates during the 2008 election cycle, almost twice as much as to Republicans, according to the Center for Responsive Politics, which tracks fundraising. Private equity and investment firms gave $13.5 million to Democrats and $9.8 million to Republicans. Senate and House lawmakers have said that Obama will call for higher taxes on hedge and private equity funds, which could raise as much as $25 billion in revenue. At issue is whether to increase the tax rate on the 20 percent slice that investment managers take from the profits they earn for clients, known as "carried interest." This share of profits is now taxed at the 15 percent capital gains rate instead of the 35 percent rate normally assessed to high-income earners. Obama would like to close what liberal-leaning advocates call a "tax loophole." But this threatens to put Obama at odds with several of the most senior Democrats in the Senate. At the beginning of the last Congress, Schumer resisted a House-championed proposal to raise rates for fund managers. Kerry and Senate Finance Committee Chairman Max Baucus (D-Mont.) are still undecided about such a proposal. "I want to see his budget," said Baucus. "There's lots of way to do lots of things." Baucus, who held several hearings on raising rates for hedge funds in 2007, predicted the plan would meet with some resistance from Democratic senators. Baucus also said that Obama's proposal deserved to be on the table. Kerry told The Hill he had concerns when the Senate last visited the issue two years ago. "I was concerned we were trying to draw distinctions among the different entities it might or might not be applied," Kerry said. But the political tide has begun to turn as many Americans blame banks and investment funds for precipitating the economic crisis that has frozen the nation's credit markets. Kerry acknowledged a new political dynamic since the Wall Street meltdown: "I think the argument is much different now in the context of what has since happened." Dana Chasin, senior policy adviser at OMB Watch, which supports higher taxes on such funds, said Kerry has perceived correctly. "Within the hierarchy of Dante's inferno of whipping boys, it's pretty clear that hedge fund managers are at the bottom rung," he said Schumer now says he would vote for a tax increase for hedge funds and private equity groups. Schumer pointed to his vote in December 2007 to support ending debate on an a measure to freeze the Alternative Minimum Tax (AMT), which would have been paid for in part by raising the tax rate on carried interest from 15 percent to 35. Baucus and Kerry also voted for cloture, but Republicans mustered enough votes to block the AMT measure. Chasin, however, said that the vote was not a clear statement of lawmakers' positions on raising taxes for hedge and private equity funds. "It was not a pure play," said Chasin. "Principally it was a vote on AMT." Chasin noted that Schumer had referenced a procedural vote and not a final vote on legislation, and that the carried-interest proposal was combined with other revenue-raising provisions. Proponents of raising tax rates for hedge fund managers also note that the December 2007 vote was a relatively easy one for Democratic supporters of the financial industry because they knew enough Republicans opposed the measure to block it.