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Private equity tax hike loses steam in Senate

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Times Staff Writer

washington -- A populist push to hike taxes on private equity firm partners is apparently petering out in the Senate, following a fierce lobbying effort by those who faced whopping tax increases under the legislation.

Influential House members remain interested in the measure. But Senate Majority Leader Harry M. Reid (D-Nev.) has quietly signaled to the investment firms that he does not plan to schedule the tax hike for consideration before members adjourn for the year, possibly next month.

“Sen. Reid has been saying for some time now that the fall schedule is tight, and we might not be able to do everything we want to do,” Reid spokesman Jim Manley said in a statement Tuesday.

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For months, the Senate majority leader has expressed doubt about the likelihood that his chamber would vote on the tax hike in 2007.

He recently assured private equity firms that that remains the case, the Washington Post reported Tuesday.

The issue centers on a tax provision that enables certain super-rich investors to pay less on their earnings than many working Americans.

The beneficiaries of this clause, including partners in private equity firms, are allowed to treat much of their earnings as capital gains, which are taxed at 15%, rather than as ordinary income, whose maximum tax rate is 35%.

Private equity firms specialize in taking troubled companies private, whipping them into shape and reselling them for huge gains.

In the process, some are rewarded with lavish profits and billions of dollars in wealth.

The tax provision emerged as a public issue this year, when news reports spotlighted some of these companies and their wealthy managers.

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For example, when Blackstone Group went public in June, the ownership stake of Chief Executive Stephen Schwarzman was valued at about $7.5 billion.

The House and Senate have held several hearings on the subject, with critics assailing the tax provision as an unfair preference for the rich. A bill sponsored by Reps. Sander M. Levin (D-Mich.) and Charles B. Rangel (D-N.Y.), who is chairman of the Ways and Means Committee, would eliminate the preference for private equity, hedge, venture capital and some other firms.

Democratic presidential candidates, including Sen. Hillary Rodham Clinton and Barack Obama, also have expressed the view that super-rich investors should not enjoy lower tax rates than middle-class workers.

In response, private equity and other financial firms have defended the tax policy, testifying that it justly rewards those who risk capital to strengthen the U.S. economy.

To make sure that message is heard, private equity firms have spent at least $6.5 million this year on lobbying efforts, a dramatic increase over prior years, according to the Center for Responsive Politics, a watchdog group. One such contract, awarded by Blackstone to Ogilvy Government Relations, totaled $3.7 million, the center said in a recent analysis.

“This is not money to make something happen,” said Massie Ritsch, spokesman for the Center for Responsive Politics. “This is money being spent to prevent something from happening -- and so far it appears to be successful.”

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The private equity industry also remains wary of a separate, more narrow proposal, sponsored by leading members of the Senate Finance Committee, that would limit the tax hike to partners in those private equity firms, such as Blackstone, that become publicly traded companies. That proposal also appears stalled in the Senate but has support in the House.

John A. Ford, a vice president of Blackstone Group, declined to comment Tuesday on reports that the tax hike was dead in the Senate.

In the House, meanwhile, Rangel remains interested in the notion of raising taxes on private equity as part of a larger effort to overhaul the tax code and consider issues of fairness. The House panel may unveil an ambitious package of proposals, possibly including the tax hike on private equity, within the next several weeks.

The debate over tax fairness is likely to continue because many lawmakers wish to amend a separate tax provision, known as the alternative minimum tax, that could potentially raise taxes for 23 million taxpayers this year. It is possible that the investors’ tax break could become part of a broader legislative package, although Reid’s comments cast doubt on its ultimate prospects.

“We’re still looking at this issue in the context of simplifying the tax code to promote equity and fairness,” said Matthew Beck, a spokesman for the House Ways and Means Committee. “We’re still moving forward.”

Outside the halls of Congress, the tax-fairness issue may resonate with certain Democratic audiences, and it appears likely to endure as grist for the emerging electoral debate.

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jonathan.peterson@latimes.com

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