July 26, 2007 8:13 pm

Private equity and tax

Democratic senator Charles Schumer wants to pour oil on troubled waters. In opposing proposed legislation to raise taxes on private equity and hedge fund public partnerships, he argues thus: if limited partnership tax benefits are to be altered for these investment managers, why not do so for other industries, such as oil and gas, in the interests of fairness?

The backlash against financiers is gaining momentum, particularly within Mr Schumer’s own party. He has astutely agreed that a review is necessary. But his constituency is New York. So, in widening the proposed legislation’s potential impact, Mr Schumer does not say a firm “no” to it, but he does cast doubt on its coherence. Mr Schumer’s position is justified, if only because such tax breaks are inevitably a line-drawing exercise in a grey area.

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Yet the political atmosphere suggests that once 2008’s presidential election is over, such asset managers should, at the very least, not expect to continue benefiting from low rates of capital gains tax on carried interest.

Could this debate push other types of partnerships into the firing line? Two issues mitigate the threat. First, energy security is another potent political rallying cry, so any move that smacks of disincentivising investment in oil and gas infrastructure is also open to attack. Second – and this applies to real estate trusts too – these are well established structures. Any change to their fiscal terms would probably require some sort of grandfathering provision to protect existing unitholders (who are also voters).

One possibility is that energy lobbyists, scared that the actions of Blackstone et al will ruin their privileges, will push for legislation targeting those companies specifically, rather than defend the principal for all partnerships. The intervention of Mr Schumer may have indirectly raised the alarm for one of the most powerful lobbies in Washington DC. How it chooses to react is less predictable.

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