Here Comes Another Attack on Carried Interest

A new deal between senators Chuck Schumer (D-NY) and Joe Manchin (D-WV) is close to offering passage of, among other things, an end to the carried interest tax break as it’s been known for years.

In the proposed “Inflation Reduction Act of 2022,” the two finally came to an agreement.  Manchin has been the main spoiler of Biden administration policy ambitions and key to getting a big piece of legislation passed. Included in the bill is a section called “Closing the Carried Interest Loophole.”

The section would require gains of a partnership interest to be held for a minimum of five years to receive treatment as a long-term capital gain rather than the ordinary income rates that apply to short-term capital gains. Currently, the holding period is three years.

Under the proposal, the five-year requirement still drops to three years in some cases, like if a taxpayer other than a trust or estate has adjusted gross income of less than $400,000. But for most real estate transactions, someone would have to consider whether an increased short-term profit would more than outweigh additional tax.

Many politicians have threatened the carried interest tax break in the past. The Biden administration put it, along with other tax treatments, on the chopping block in the spring of 2021. That went nowhere. Last September, Democrats filed a bill that seemed to group real estate with other uses of carried interest, requiring a similar holding period of five years. Again, it didn’t come to fruition.

What makes this attempt more potential for success is that Manchin is apparently on board. The process the Senate would take would be reconciliation, which restricts bills to addressing government revenues and outlays, and that only requires a simple majority because it is not subject to a filibuster and a requirement of 60 senators to move a bill past someone’s objection.

The House already votes on simple majority. If enough of the different factions of Democrats in the House agree, it would pass. Should both bodies vote for this bill, it would go to the president who would sign it.

It seems unlikely that, having given his blessing to the bill as is, Manchin would retract his position. However, there is also Sen. Kyrsten Sinema (D-AZ), who has previously said that she opposed closing the carried interest provision, according to Vox. And she has yet to state where she stands on this legislation.

Also, as Vox noted, the Senate is set to adjourn on August 5, leaving a short window for fast passage. Plus, Democrats need every single senator in their caucus to be present and voting, and a number have been out because of Covid-19. Senate leadership could shorten or eliminate the August recess, though that’s an unpopular move.