Carried-Interest Tax Hike Delayed Again

Jun 17 2010 | 10:58am ET

Hedge and private equity fund managers are still likely to face a major tax hike, but not just yet.

The tax and unemployment benefits bill that includes the closing of the so-called “carried-interest” loophole suffered a setback yesterday when the U.S. Senate voted against suspending its spending rules to pass the legislation. Senate rules require that any new costs be offset by savings elsewhere, but the bill, which would extended jobless benefits and some popular tax breaks as well as offer additional aid to states, fell $85 billion short of that goal.

The defeat—a dozen Democrats joined with the Republican minority to sink the plan—means that Senate leaders will have to come up with a cheaper version of the $140 billion plan, one that Senate Finance Committee Chairman Max Baucus is said to be working on already.

Both sides say they expect some form of the bill to pass eventually, and given the gap in spending and saving, it seems unlikely that the increased revenue from taxing most performance and incentive fees as ordinary income, rather than at the lower capital-gains rate, would be jettisoned. But the setback does mean than any bill emerging from the Senate will likely require a vote in the House of Representatives, which has already approved the more expensive plan.

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