- On Wednesday night, Democratic Sen. Joe Manchin dropped a surprise spending deal.
- The package will put billions towards climate, and close a tax loophole used by the rich.
Senate Democrats aren't worried that taxing top earners just months before the midterms elections will haunt them this fall. They say the proposed changes to a tax loophole baked into their reconciliation spending deal as an inequality fix that's long overdue.
"This Senate Democratic majority will ensure the wealthiest corporations and individuals pay a fairer share in taxes," Senate Majority Leader Chuck Schumer said Thursday at the US Capitol while debriefing congressional reporters about the state of play of the stunning deal he and centrist Democrat Sen. Joe Mahchin of West Virginia sprung on everyone late July 27.
The package, which tackles prescription drug pricing, health care coverage, and climate change issues, also includes a new corporate minimum tax on companies with billions in profits as well as the tweak to a tax loophole called "carried interest" which allows investors to pay a lower tax on profits they earn as income.
Closing the carried interest loophole is likely to be one of the thorniest sticking points in moving the Inflation Reduction Act of 2022 forward. Several Republicans denounced the current proposal as an inflation-stoking tax hike they suspect will draw the ire of tax-averse centrist Democrat Sen. Kyrsten Sinema of Arizona. The bill also has to get the greenlight from the Senate parliamentarian before Schumer can hustle anything out for a floor vote.
"I know this has been something that Sen. Sinema had concerns about. And I don't think they checked with her beforehand," Senate Finance Committee member and GOP whip John Cornyn of Texas said of Schumer's legislative gambit, adding that "it is very definitely a tax increase."
Like it or not, Sen. Elizabeth Warren of Massachusetts said Democrats were doing "exactly the right thing" by chipping away at the longstanding tax break.
"The adjustments to carried interest are going to fall on the richest Americans who have been using a tax loophole to not pay the taxes that everybody else has to pay," Warren told reporters at the US Capitol, adding that she also wholly endorses the minimum corporate tax included in the bill. "These are good moves."
Schumer declined to comment on whether he'd consulted with Sinema before rolling out this latest bundle. "Members are reviewing the text, and we'll all be talking shortly," he said of the swirling negotiations.
Sinema has, so far, refused to comment on the revived reconciliation package — remaining tight-lipped even as reporters peppered her with questions Thursday as she left the Capitol.
—Manu Raju (@mkraju) July 28, 2022
The carried interest loophole debate has raged for years, supported and opposed by both sides of the aisle
The so-called carried interest loophole refers to how compensation works for people in fields like private equity and real estate. Essentially, when they invest in a company, they're paid by getting a percentage of the profits. Those profits are taxed at the capital gains tax rate, which is far lower than the tax rate placed upon a straightforward paycheck.
In essence, "private equity managers and these real estate managers who structure their compensation in the form of carried interest pay a much lower tax rate than others who make their living from bonuses and wages and salaries," according to Steve Rosenthal, a senior fellow at the Tax Policy Center.
The debate over carried interest isn't new. "I think a lot of Americans over the years have heard the message that these private equity managers are not entitled to be taxed at lower rates," Rosenthal said.
The reforms that Democrats are proposing — which they estimate would bring in $14 billion over the next ten years, a fairly low sum for a tax measure — are not a new idea, nor one that's straightforwardly partisan. Both Donald Trump and Hillary Clinton were in favor of closing the loophole, but Trump's 2017 tax package ultimately failed to close the loophole entirely.
Instead, it added a three year holding period, meaning that private equity funds would have to hold onto their portfolio companies for at least three years before cashing out. Now, the new Democratic proposal would extend that period to five years.
"The idea is if they sell their interests, either they find a buyer for their portfolio company, or the company goes public and does an IPO sooner than five years, they would pay ordinary income tax rates," Samantha Jacoby, a senior legal tax analyst at Center on Budget and Policy Priorities, told Insider.
"It's a loophole closer for very highly paid people who buy and sell companies"
Democratic Sen. Raphael Warnock of Georgia, who is being challenged for reelection this fall by Trump-backed former football star Herschel Walker, said slashing prescription drug costs for his cash-strapped constituents and addressing the "existential threat of climate change" would be worth any flack he might catch about carried interest rates.
"This bill takes us in the right direction," Warnock told Insider in the tunnels beneath the US Capitol.
Democratic Sen. Catherine Cortez Masto of Nevada, who is also on the ballot in November, said she's still working her way through the lengthy bill, stressing that she wants to ensure that "Nevadans are not harmed in any way" and that families making less than $400,000 a year won't see higher tax bills.
"For the person at home, it's not going to raise their taxes," the CBPP's Jacoby said. "It's a loophole closer for very highly paid people who buy and sell companies."
Sen. Brian Schatz, who is also up for reelection this fall, didn't shrink from the targeted tax changes.
"Do you know any people in private equity that make less than $400,000?" he asked Insider, chuckling a bit as if to say he had no problem with closing the carried interest loophole.
GOP tax writer Sen. Chuck Grassley of Iowa panned the reconciliation plan as "an inflation enhancement bill."
"We're in a recession. You shouldn't be raising taxes," he said between votes on Capitol Hill.
Grassley left the door open to tweaking carried interest rates — pointing to the three-year holding period rule woven into the 2017 tax bill Trump signed into law as an example — but warned that rushing things wouldn't work for him.
"Can there be some changes made in carried interest? Yes, I think there can be," Grassley told Insider. "If they want to get it done next week, the answer is 'no.'"
Republican Sen. Marco Rubio of Florida brushed off the whole Democratic bundle as ill-timed government spending.
"This is not really an economic bill. It's a climate bill decorated with tax measures," Rubio told Insider.