Reid says senate may act on tax rise for fund managers in 2008

Senate Majority Leader Harry Reid said lawmakers won't take up legislation this year that would increase taxes on some managers of hedge funds, buyout firms and real-estate partnerships and may consider it in 2008.

"It won't be this year,'' Reid, a Nevada Democrat, said in an interview yesterday. "It could be next year.''

Reid said he favors legislation that would affect partnerships beyond private-equity firms, such as those that invest in commercial real estate and oil and gas pipelines.

A Democratic proposal in the House would more than double the tax rate paid by hedge funds and private-equity firms or their managers. It would tax so-called carried interest -- the share of profits that managers receive for their services -- as wages at rates as high as 37.9 percent, rather than the capital- gains rate of 15 percent. The legislation takes Reid's approach of including commercial real estate and other partnerships.

Reid is still weighing various options and ``hasn't ruled anything in or out,'' his spokesman, Jim Manley, said yesterday.

The Senate Finance Committee last week began debating whether to draft a similar measure. Last month, the panel's Democratic chairman, Max Baucus of Montana, and its ranking Republican, Charles Grassley of Iowa, introduced separate legislation that would tax publicly traded hedge funds and private-equity firms, such as Blackstone Group LP, as corporations rather than partnerships. That would effectively raise their tax burden from 15 percent to as high as 35 percent.

Baucus said July 11 that the committee's legislation would be considered earlier than the broader bills proposed in the House.

Raising the Rate

The Bush administration is signaling that it may not support the proposals. At a hearing this month before the Senate Finance Committee, Eric Solomon, assistant Treasury secretary for tax policy, said raising the tax rate on private-equity firms could hurt U.S. competitiveness. White House spokesman Tony Snow also recently criticized the proposals as tax increases.

Some Democrats also have expressed reservations. Senator Charles Schumer of New York, who chairs the Senate Democrats' fundraising committee, is pushing for other types of partnerships to be included in any legislation.

"If we are going to change how we tax financial partnerships, we should treat oil and gas and venture capital and real estate and everything else the same,'' Schumer said July 11.

Reid said he finds Schumer's arguments persuasive. The measure "shouldn't apply just to the private-equity groups, it should apply to all that are similarly situated,'' Reid said.

Hedge funds and private-equity firms have poured millions of dollars into lawmakers' campaign coffers. About two-thirds of campaign donations from employees of the biggest hedge funds and buyout firms last year went to Democrats, Federal Election Commission records show.

(Published by Bloomberg, July 17, 2007)


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