Though the Senate passed its Tax Extenders legislation in mid-March without including House language to change the tax treatment of the “carried interest” income of investment managers, the issue may receive a second look in the coming weeks.
Portions of the Tax Extenders legislation – which include a variety of popular tax credits and extended assistance to the unemployed – must be offset by spending cuts or tax increases elsewhere, but some of the Senate’s original offsets were instead used to pay for the final healthcare legislation that was enacted last month.
As a result, the Senate’s Tax Extenders bill now has a $30 billion hole and not many options to fill it – a predicament that appears to be increasing the likelihood that leaders may revisit the issue of changing the tax treatment of carried interest. By taxing this income at regular income rates rather than the current practice of taxing it at capital gain rates, lawmakers would be able to plug the gap and get final legislation across the finish line.
Although historically unpopular in the Senate, the possibility exists that carried interest language could be watered down (such as by delaying its implementation date), in order to make the provision acceptable to skeptical Senators.