When Democratic centrist Senator Kyrsten Sinema gave the go-ahead this week to move forward with her party’s much-needed version of the long-awaited climate and tax bill, her colleagues breathed a sigh of relief.
However, Sinema’s assent came with a notable condition: abandoning a promise to close a notorious tax loophole allowing private equity and hedge fund managers to lower their tax bills.
On the face of it, the decision to insist on keeping a provision that benefits some of America’s wealthiest people seems far removed from the concerns of voters in Sinema’s southwestern home state, the ‘Arizona.
However, analysis by the FT shows the senator enjoys significant contributions from the private equity industry – whose lobbying machine and policy influence has grown increasingly powerful over the past two decades.
According to Federal Election Commission filings, Sinema has received more than half a million dollars in campaign donations from private equity group executives this election cycle alone, which is about 10 % of its fundraising from individual donors. This includes individual donations totaling $54,900 from KKR executives, $35,000 from Carlyle, $27,300 from Apollo, $24,500 from Crow Holdings Capital and $23,300 from Riverside Partners.
Sinema is not the only Democrat to have received funding from the private equity industry. Leaders of groups including Blackstone, KKR and Lazard also collectively donated $1.28 million to New York Senator Chuck Schumer, the Senate’s top Democrat, accounting for about 4.4% of his fundraising from of individual donors this cycle.
A spokesperson for Schumer said he was “a longtime champion of closing the interest loophole”, adding that he had “worked until the very end to try to maintain the provision in the legislation and will continue to seek opportunities to eliminate it”.
A Sinema spokeswoman said she had been “clear and consistent for over a year that she would only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness.” .
“At a time of record inflation, rising interest rates, and slowing economic growth, discouraging investment in Arizona businesses would harm Arizona’s economy and its ability to create jobs,” the spokesperson said.
Sinema, who wields outsized influence in a 50/50 split Senate, has been a frequent roadblock to Democrats’ legislative plans, refusing to back various past iterations of the Build Back Better bill, now renamed the Inflation Reduction Act.
After days of heated negotiations, Sinema this week agreed to ‘move forward’ with passing the legislation, after the proposal to extend the holding period for investments eligible for deferred interest tax treatment was dropped. three to five years.
The so-called carried interest provision has survived a succession of attempts to remove it over the past 15 years, with former Presidents Barack Obama and Donald Trump both promising to do so during their campaigns.
The loophole first made headlines in 2007, when a wealthy tax law professor pointed out in an academic journal that a “quirk” in US tax law allowed some of America’s wealthiest people to “pay taxes on their labor income at a low rate”.
It was seriously threatened in 2010 and 2017, when Democrats and then Republicans tried to change or abolish it, but it escaped political repression each time.
Analysts attribute the controversial tax break’s survival — seemingly against political odds — to its relatively low public profile and the success of Washington’s increasingly sophisticated private equity lobbying operation.
“A lot of issues like this never get resolved and never go away, largely because they’re big fundraising issues for politicians,” said James Lucier, an analyst at Capital Alpha Partners.
“My K Street friends call them ‘evergreens,'” Lucier added, referring to the Washington DC street on which lobbying firms are typically based. “These are issues that are never resolved, because they are just great for fundraising.”
Democrats estimated that their proposal to close the carried interest loophole would generate a relatively modest $14 billion in revenue. However, the tax provision is worth significant sums to the personal wealth of investment executives.
“There’s a real asymmetry there,” said Andrew Park, senior analyst at the nonpartisan group Americans for Financial Reform.
“This loophole is a lot of money personally for individual private equity executives, so they’re investing money in the fight to preserve it,” Park said. “But it doesn’t bring in a lot of money, by US government standards, so lawmakers often turn to other sources.”
Blackstone private equity executives were due to receive nearly half a million dollars in interest-based compensation at the end of last year, assuming their investments were sold at year-end value 2021, according to documents analyzed by the FT.
Although the proposal to close the carried interest clause is politically popular among voters, according to political advisory firm Beacon Policy Advisors, it is not a loaded enough issue to actually change voting habits.
“Interest is the epitome of tax lobbying,” said Ben Koltun, research director at Beacon. “There are taxes that a lot of people care a little about, but a few care a lot about.”
“Elimination of carried interest is popular in the polls,” he added. “But no politician is going to win or lose an election because of interest.”