What usually happens when policymakers try to tax private equity profits? Play it again, Sam. The president tells Congress that it’s time to close a major tax loophole that largely benefits the private equity industry. Lawmakers float legislation that would raise taxes on the industry’s profits, which are known as carried interest. Finally, after months of campaigning, the PE tax policy changes approved by Congress are minor, nonexistent or ultimately benefit major investment firms. President Donald Trump is trying to tear up that script. The president wants to raise taxes on private equity profits to help pay for populist campaign promises like eliminating taxes on overtime, tipped income and Social Security benefits. Republican lawmakers are scrambling to find revenue to chip away at the gargantuan deficits that will come with the extension of Trump’s 2017 tax cuts. And Trump is starting this fight with significantly more clout than in earlier battles over PE’s golden goose, with a growing contingent of GOP lawmakers behind him who are wary of Wall Street’s influence in Washington. “Trump has a lot more power in this negotiation than he did in even 2017, and I think he knows that. I think we see that in all the other elements of his governance style,” said Russ Sullivan, the chair of Brownstein Hyatt Farber Schreck’s national tax policy group and a longtime top adviser to former Senate Finance Chair Max Baucus (D-Mont.). “If he really wants to make that happen, he's going to make that happen.” Private equity has a storied history of beating back similar efforts. But Trump’s latest attempt comes as more Republicans are echoing what has typically been Democratic talking points about the industry’s profits. Progressives like Sen. Elizabeth Warren (D-Mass.) and Rep. Pramila Jayapal (D-Wash.) have long maintained that carried interest collected by fund managers should be taxed at ordinary income rates as high as 37 percent, rather than the 20 percent rate applied to long-term capital gains. Even though private equity investments are mostly funded through institutional investors and the wealthy, industry executives say that their contributions in the form of time, energy and expertise is “sweat equity” that entitles them to a lower tax rate. Industry lobbyists clocked a telling exchange during last week’s markup of the House GOP’s budget resolution when Rep. Chip Roy (R-Texas) praised Jayapal for “being in complete agreement with Donald Trump in wanting to remove the carried interest loophole.” “We have consensus,” chuckled House Budget Chair Jodey Arrington (R-Texas). For now, industry officials are hopeful that Republican leaders like Majority Leader John Thune of South Dakota and Senate Finance Chair Mike Crapo of Idaho will continue to serve as a firewall against any push to treat carried interest as ordinary income. But newer members, particularly in the House, may not place as much of a premium on the private equity’s interests as their predecessors. When asked about carried interest by The Hill last week, House Ways and Means Chair Jason Smith (R-Mo.) said “every provision is on the table.” The American Investment Council, which represents many of the largest PE firms, is once again circulating memos highlighting how the industry’s investments support 12 million U.S. jobs and deliver critical returns for public sector retirement plans. Notably, before Trump put carried interest back on the menu, the AIC put out a report last month detailing the industry’s investments in the states and districts represented by newly elected members. National Venture Capital Association President and CEO Bobby Franklin, whose members would also be affected by Trump’s proposal, told Declan that “all the pain” from changing carried interest’s tax treatment would fall on smaller venture funds while doing little to raise revenue. (The Congressional Budget Office estimates taxing carry as income would reduce the deficit by $13 billion over the next decade.) “This is symbolic. This is because somebody won the argument about calling it a loophole, which it is not,” he said. “So we have to go up there and educate — over and over and over again.” IT’S TUESDAY — Of course, no one in Casablanca ever says, “Play it again, Sam.” But it’s a killer line. Have tips, thoughts or suggestions? Email Sam at ssutton@politico.com
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