Manchin-Schumer deal closes real estate tax loophole

Package would raise taxes on carried interest, including developers’ “promotes”

Senator Chuck Schumer (D) and Senator Joe Manchin (D) (Illustration by Kevin Cifuentes for The Real Deal with Getty)
Senator Chuck Schumer and Senator Joe Manchin (Illustration by Kevin Cifuentes for The Real Deal with Getty)

Senate Majority Leader Charles Schumer and Sen. Joe Manchin have agreed to a deal on long-stalled legislation that would kill the carried-interest tax loophole, which is treasured by some in the real estate industry.

The senators announced a compromise on the Biden administration’s tax, energy and climate bill on Wednesday, Bloomberg reported. The plan, previously curtailed by Manchin’s ardent opposition, would generate an estimated $739 billion in revenue while spending $433 billion and reducing deficits by $300 billion.

One of the tenets of the compromise is higher taxes on carried interest, which is a huge part of hedge fund managers’ pay but also applies to a performance fee for developers known as a “promote.” The senators’ plan would raise taxes on carried interest by about $14 billion, presumably by treating it as ordinary income rather than as a capital gain.

Other beneficiaries of carried interest include private equity and venture capital firms. A promote is a financial interest in the long-term capital gain of a development. Critics have long argued that income that does not result from risk-taking, such as the 2 percent of assets under management that hedge funders typically collect.

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Manchin, citing inflation, has been balking at a package of climate change measures and tax increases, denying Senate Democrats the 50th vote they need to pass legislation without Republican support. In a statement, Manchin expressed support for eliminating the favorable tax treatment of carried interest, which is not a significant source of income in his state, West Virginia.

The agreement provides $369 billion for energy and climate change initiatives, including electric vehicle tax credits sought by automakers including Toyota and Tesla. The agreement did not, however, raise the annual deduction limit for state and local taxes, or SALT, which Republicans reduced to $10,000 in their December 2017 tax reform, to the dismay of blue states and the real estate industry in them.

Schumer also dropped his demand for a surtax on high earners and a tax on stock buybacks.

The Senate is expected to vote on the legislation next week. The bill will go through the budget reconciliation process in order for it to bypass a Republican filibuster, though it would still need support from the entire Democratic caucus.

It’s not clear if Sen. Kyrsten Sinema supports the agreement, though it includes many provisions she has favored. In the past, however, Sinema has opposed ending the carried interest tax break, which its beneficiaries have protected by making large and sustained campaign contributions to members of Congress, not to mention over-the-top comparisons.

— Holden Walter-Warner