How Wall Street is wooing Sen. Kirsten Sinema and keeping its multibillion-dollar tax break for carried interest

U.S. Senator Kirsten Sinema (D-AZ) waits for an elevator to get to the Senate floor of the U.S. Capitol in Washington, U.S., August 2, 2022.

Jonathan Ernst | Reuters

Long before Sen. Kirsten Sinema, D-Ariz., floated a massive spending bill that promised to create jobs, invest in clean energy and tax the wealthy fulfilling some of the most important campaign promises of President Joe Biden and the Democratic Party – Wall Street investment firms had donated millions to the freshman senator’s campaign.

One of her main objections was the bill’s so-called carried interest tax provision — which would have closed an arcane tax loophole that allowed hedge fund managers, law firm partners and private equity executives, among others, to pay significantly less tax than ordinary workers.

Closing that loophole, which was estimated to raise $14 billion in tax revenue over the next decade, was supposed to help pay for $433 billion in spending on climate and health initiatives.

To get Sinema’s vote and get the bill passed, Senate Majority Leader Chuck Schumer said Democrats “have no choice” but to remove that provision from the broader Inflation Reduction Act. Instead, the bill imposes a 1 percent tax on all corporate share buybacks along with a minimum corporate tax rate of 15 percent for companies with revenues above $1 billion. The massive spending and tax package plowed through an evenly divided Senate 51-50 on Sunday with Vice President Kamala Harris casting the deciding vote. It is expected to pass the House later this week.

American Investment Council

As Biden rallied support in the Senate a little more than a year ago to close the loophole, the head of the trade group representing the world’s largest private equity firms has begun increasing pressure on Sinema and fellow Arizona senator Mark Kelly, who also is a democrat.

“Arizona Sens. Kirsten Sinema and Mark Kelly will be critical voices and votes in the upcoming infrastructure debate,” wrote Drew Maloney, president and CEO of the American Investment Council, in an op-ed published by an Arizona news outlet. The trading group represents some of the world’s largest private equity firms, including Blackstone, Apollo Global Management, Carlyle Group and KKR. “I urge them to continue to support the role of private investment in helping small businesses here in Arizona and across the country,” he added.

One of the group’s top priorities then, and now, is preserving “interest capital gains carryforwards and preventing the elimination of interest deductibility.”

“Our team is working to ensure that members of Congress on both sides of the aisle understand how private equity directly employs workers and supports small businesses in their communities,” Maloney said in a statement to CNBC. “Our advocacy helped prevent punitive tax increases that would have made it more difficult for investors to continue supporting jobs, small businesses and pensions in every state.”

Sinema has been fighting to help preserve the loophole since at least last year, when he told Democratic leaders he opposed closing the tax break for carried interest. It was subsequently removed from the House bill, according to NBC News.

Sinema’s opposition, along with a flurry of concerns from Sen. Joe Manchin, DW.V., helped scuttle a much more stretched version of the bill, which was significantly watered down to win over the two moderate Democrats.

“What’s Best for Arizona”

“Senator Sinema makes every decision based on one criteria: what’s best for Arizona,” Sinema spokeswoman Hannah Hurley told CNBC in an email. She said Sinema has been clear for more than a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness. Sinema believes “de-incentivizing” business investment in Arizona would hurt the state’s economy and its ability to create jobs, Hurley said.

In the weeks leading up to Sunday’s vote, Sinema’s office was inundated with calls from lobbyists representing hedge funds, private equity firms and other money managers opposed to closing the carried interest tax loophole, according to people familiar with the matter. . In the run-up to last week’s deal, the senator and her team held numerous one-on-one meetings with the industry, said some of the people familiar with those meetings, who requested anonymity to speak freely about private efforts to connect with Sinema.

Since being elected to the Senate in 2018, Sinema has enjoyed industry sympathy. Last September, she met for lunch at a Philadelphia restaurant with Michael Foreman, who manages at least $34 billion as chief executive of Philadelphia-based investment firm FS Investments, and one of his executives, according to people familiar with the lunch. Forman did not respond to emails and calls for comment.

“Any major industry that doesn’t support what’s out there is meeting with Sinema, and it’s meeting with anyone and everyone,” a lobbyist representing some of the world’s biggest investment firms told CNBC before Schumer’s late announcement on Thursday that Democrats agreed to drop the carried interest provision to get her vote. Sinema said he would work separately “to implement tax rate reforms.”

Private equity donors

Even before Sinema was elected to the Senate in 2018, she supported private investors as a member of the House of Representatives. In 2016, Sinema said the industry provides “billions of dollars each year to Main Street businesses,” according to the New York Times.

Sinema won a coveted seat on the powerful Banking Committee and made quick work of networking with — and fundraising from — the industry he would oversee. Since the start of the 2018 election cycle, she has raised at least $2 million from the securities and investment industry — surpassing Senate Banking Chairman Sherrod Brown’s $770,000 in donations to the industry over the same time, according to Federal Election Commission data analyzed by the nonpartisan campaign finance watchdog OpenSecrets. Sinema and Brown, D-Ohio, are both up for re-election in 2024.

Sinema’s income includes $10,000 in campaign donations from the American Investment Board’s political action committee, half of which was donated to her campaign after Maloney’s publication last year.

Employees of private equity firms Kohlberg Kravis Roberts, Carlyle Group and Apollo Global Management have donated a total of more than $95,000 to Sinema from the 2018 election through the current 2022 election cycle, according to campaign finance records.

That includes $11,600 in combined donations from KKR co-founders Henry Kravis and George Roberts, according to Federal Election Commission filings. The Carlisle and Apollo political action committees also donated a total of $15,000 to Sinema’s re-election campaign, records show.

Representatives for KKR and Carlyle declined to comment. Representatives for Apollo and Blackstone did not respond to requests for comment.

“Hats off to the P/E lobby!”

The reason some of Wall Street’s wealthiest money managers want to keep the carried interest loophole is that it taxes their profits at a lower rate than ordinary income. Instead of paying standard individual tax rates of up to 37% for individuals earning more than $539,900 ($647,850 for married couples filing jointly), carried interest is taxed at the capital gains rate, which is typically around 20% for high-income earners , as long as the investment is held for at least three years.

Democrats wanted to force executives to hold those investments for at least five years to get a better rate. The industry defends the tax break for carried interest, saying it helps preserve investments that benefit small businesses. Critics say it’s just a massive tax break for the wealthy.

Lloyd Blankfein, former CEO of Wall Street investment bank Goldman Sachs, mockingly congratulated the private equity industry on Twitter after the carried interest provision was removed from the DCA: “Hats off to the P/E lobby! After all these years and budget crises, the highest paid people still pay the lower capital gains tax on their labor income.”

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