US House eyes tax on 75% of carry as ordinary income

US Senator Max Baucus and Representative Sander Levin have introduced today a new legislative measure to a larger jobs bill being considered in the House of Representatives this week that would increase the tax rate on carried interest. 

The House will vote on the bill next Tuesday. Sources say that passage is expected in the House.

Under the new proposal, GPs would still pay taxes at the capital gains rate on profits from capital they invest in their funds. But 75 percent of the remaining carried interest would be taxed as ordinary income. 

The bill includes a gradual phase-in: in 2011 and 2012, only 50 percent of carried interest would be taxed as ordinary income. In 2013 and beyond, 75 percent of carried interest would be taxed as ordinary income.

The House of Representatives already passed legislation in December 2009 that would tax carried interest – 100 percent of it – as ordinary income, as part of their Tax Extenders Act of 2009. But unlike the Tax Extenders Act, the new bill would make the change permanent, according to a summary of the bill.

The Senate is still debating whether to increase taxes on carried interest. In the January, a member of the Senate Finance Committee told Crain’s Detroit Business that a hike in the rate of taxation for carried interest would “not be part of any bill we pass”. 

But the fact that Senator Baucus is working on the new measure indicates that it has at least some support in the Senate. After the House votes, the Senate will consider its own version of the bill. After the Senate passes its version, the two will be reconciled in committee before being signed into law.

At a conference in Miami this May, Doug Lowenstein of the Private Equity Council said on a panel that members of the private equity industry were working with legislators to negotiate a “hybrid” tax rate for 

carried interest that would be lower than ordinary income, but higher than capital gains.