- Manchin and Sinema are set to clash over a tax loophole affecting wealthy investors.
- Manchin wants to close the carried interest, but Sinema can eliminate the change from the bill.
- It is possible that Democrats will wait days or even weeks for Sinema to break his silence.
Senate Democrats are relearning an old Argentinian dance lesson: It takes two to tango.
Sen. Joe Manchin of West Virginia surprised many when he struck a deal on a $790 billion climate, health care and tax package. The legislation is much bigger than most Democrats thought possible just two weeks ago, when Manchin appeared to take climate programs and tax hikes off the table, citing growing inflation fears.
But the most carefully negotiated deals can still be upset in an environment where no margin for error exists. Manchin is on a collision course with Sen. Kyrsten Sinema of Arizona over a small part of the bill. The pair disagree on carried interest, a loophole in the tax code that mainly benefits wealthy investors and hedge fund managers.
Eliminating carried interest is a goal that has eluded Republican and Democratic administrations for a decade. It is the percentage of profits that hedge fund managers receive from lucrative investments. But that compensation is taxed at a lower capital gains rate that caps at 23.8% and doesn’t face a higher income tax rate like most Americans pay out of their paychecks. Critics argue this amounts to a huge loophole in the tax code.
Sinema was left out of private negotiations between Manchin and Senate Majority Leader Chuck Schumer. This would have prompted her to ask her fellow senators “What’s going on?” when news of the deal broke in the Senate.
“This is the latest disconcerting move by Senate leadership and it doesn’t appear to be a strategy designed to maximize the chances of success,” John LaBombard, a former Sinema aide, told Insider. He said the Arizona Democrat has long had “a particular interest” in tax proposals in the mix. “It seems like a very odd strategy to me to let the rest of the caucus learn about the deal from a press release.”
For his part, Manchin has expressed strong support for the measure and does not seem inclined to abandon it. Last year, he joined two Senate Democrats in sponsoring a bill eliminating carried interest. “The only thing I was adamant about was interest,” he told reporters on Thursday.
Sinema is known to have objections to narrowing interest, according to a familiar Democratic aide. But Democrats hope it is not defeated because it represents the only tax increase on wealthy individuals under the bill. Sen. Elizabeth Warren of Massachusetts said Democrats were doing “exactly the right thing” by including him.
Others warn that the party is going to be bumpy. But the finish line is in sight after a year of tense negotiations that still hinge on Manchin and Sinema. “Until you do, there are twists and turns,” Sen. Tim Kaine of Virginia told Insider. “Senator Sinema is going to do her own due diligence, which she is doing.”
Sinema’s office said in a statement it was still reviewing the 725-page legislation and awaiting decisions from the Senate legislator, which governs what qualifies under reconciliation, the legislative maneuver Democrats use to avoid a Republican filibuster and pass the bill along party lines in the equally divided Senate. Democrats may be waiting days or even weeks for Sinema to break his silence on the package.
Schumer declined to comment on Thursday whether he had updated Sinema. “Members are reviewing the text, and we’ll all be talking about it shortly,” he told a news conference. He aims to put the bill on the ground next week.
A tax loophole that Democrats and Republicans seem unable to close
Presidents Donald Trump and Barack Obama both sought to suppress the interest, but failed to do so. What’s on the table now doesn’t get rid of it either; the changes Democrats are pursuing only make it harder for wealthy investors to get the preferential tax rate on huge chunks of their income.
“It doesn’t completely close the loophole,” Kimberly Clausing, a former Treasury Department tax official for the Biden administration, told Insider. “It only partially does that by extending the length of time you have to hold the investment for it to qualify as a capital gain.”
Closing the loophole on carried interest would only affect part of the financial sector. But it’s a tax that hits a powerful group of wealthy Americans who have managed to evade tax increases so far under the Biden administration.
The American Investment Council, a lobby group that represents private equity firms like Blackstone, immediately criticized the carried interest initiative as a burden on small businesses benefiting from their investments.
“It’s like a small universe of a few hedge funds that maybe hold long-term investments, many private equity or venture capital firms,” said Ben Koltun, research director at Beacon Policy Advisors, in an interview. “It’s a very select handful of people, but also a very powerful handful of people.”
It is possible to rearrange the proposal so that it secures Sinema’s support without losing Manchin’s approval.
“There are ways to adjust it,” David Kamin, the former deputy director of the White House National Economic Council under Biden, told Insider. “But this one already represents a compromise even if it raises $14 billion by changing the treatment of a small group of people able to convert their labor income into capital gains.”
“If this were to be dropped, the amount of money wouldn’t sink into these other really important things that the bill does,” Clausing said.
However, Sinema had a huge influence on the process. This should not change.
“I certainly hope that at this point it is abundantly clear to Senator Schumer and the other party leaders that political pressure is not working on Senator Sinema,” said LaBombard, now senior vice president of public affairs firm ROKK Solutions. “After a year of repeated attempts and failures to force her into positions contrary to her long-held views, this should come as no surprise to anyone.”
Investors and fund managers hoping to eliminate deferred interest from the bill may have an ally in Sinema. Individuals and organizations in the securities and investment industry have donated $2.2 million to the Arizona Democrat since 2017, according to data from nonpartisan campaign finance tracker OpenSecrets.
“You know, one will say ‘I oppose this’ and the other will say ‘I oppose that’ and we can’t have this or that,” Steve Rosenthal, senior fellow at the Tax Policy Center , says Insider. “It’s almost like a theatrical performance right now.”