Baucus reported ready to flip on private-equity tax

By Dow Jones Newswires
Posted Sep. 9, 2010 at 10:38 a.m.

U.S. private-equity kingpins are likely to be hit with a second giant tax increase next year, the New York Post reported Thursday.

It looks like the bosses will have to dig deeper because a key ally on Capitol Hill — a lawmaker who has blocked three attempts to raise the income tax paid by buyout firms — was set to favor the so-called Enterprise Value Tax. It would more than double the tax bite when moguls cash out of their private equity firms, several sources told the Post.

The change of heart by Sen. Max Baucus (D-Mont.), chairman of the Senate Finance Committee, could cost them a more than $6 billion in higher taxes over a decade, according to estimates. Baucus’ surrender of the anti-tax ground came as momentum builds in Washington to raise taxes.

“Baucus is the biggest problem on the enterprise tax,” a partner at a large private equity firm said.

The private equity industry had braced itself for a doubling of its income tax in 2011 from the current 15 percent capital gains rate to the 41 percent ordinary income tax rate on most of the commissions they earn from buying and selling companies or carried interest. The capital gains rate was scheduled to rise to 20 percent Jan. 1.

The second tax hike was a double-whammy few expected — and one that the private equity sector was expected to fight tooth-and-nail.

A vote on the Enterprise Value Tax, part of the Tax Extenders bill, could come as early as this month when Congress returns from its recess, a Senate source said. Support for the bill collapsed earlier this summer.

Baucus wants Tax Extenders passed and feels there may be no way to do it without raising both the 20 percent carried interest rate and the Enterprise Value Tax.

“I heard a couple of weeks ago he started pushing back on lobbyists who were trying to influence him on the enterprise tax,” the Senate source said.

A partner at a large firm said the ruckus over Blackstone Group L.P. head Steve Schwarzman likening President Barack Obama’s threat to impose higher taxes to Adolf Hitler’s invasion of Poland may have helped to push Baucus into the arms of the pro-tax supporters.

“If I were a shareholder in (a private equity firm), I would assume that the firm would be paying higher tax rates next year,” a partner at another private equity firm said.

A spokesman in Baucus’ Washington office declined to comment.

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