How Private Equity Lobbying Watered Down the Corporate Minimum Tax

WASHINGTON — An hour after Democrats released the text of their climate and tax legislation, Washington lobbyists for the private equity industry sprang into action.

With a final Senate vote nearing on the major package on Sunday, a late addition would have subjected companies controlled by private investment funds to a new 15 percent corporate minimum tax in the legislation that was supposed to apply to America’s biggest corporations.

But a last-minute mobilization of political muscle and direct pleas to Senator Kyrsten Sinema, the Arizona Democrat who opposes tax increases and is sympathetic to private equity, got the measure scrapped. The blitz was emblematic of the messy nature of tax policymaking and how policies meant to curb tax avoidance can spring new carve-outs on the fly.

The issue stems from how private equity firms work: They typically invest in a portfolio of companies. Under the provision that was the point of contention, if the combined “book income” of companies controlled by the same private equity fund exceeded $1 billion, all of those companies, even if they were small or medium-size, would be liable to pay the new 15 percent tax on the income they reported to their shareholders.

“Looks like someone is trying sneak one past everyone,” Neil Bradley, chief policy officer at the U.S. Chamber of Commerce, said on Twitter on Saturday.

Freedom Works, a conservative organization that lobbies for lower taxes, blared out warnings on its Twitter feed, claiming that Democrats were targeting small firms that rely on capital investment to expand.

Private equity industry groups circulated opposition research on what they called a “stealth” tax, which they said would hit more than 18,000 companies.

At the urging of Ms. Sinema, the measure was removed after hours of horse-trading over how to replace an estimated $35 billion in government revenue that would be lost by taking out of the proposal. Ultimately, lawmakers opted to extend a rule limiting deductions that companies can take on business losses that Republicans enacted in 2017.

The new corporate minimum tax had already been whittled down before the changes over the weekend. Ms. Sinema pushed last week to preserve deductions that manufacturers use to offset the cost of equipment purchases, and lawmakers decided to keep a deduction for wireless spectrum purchases that telecommunications companies said was important for the rollout of high-speed broadband.

The big win for private equity’s lobbyists was on so-called carried interest. Democrats had proposed curbing the special tax treatment that hedge fund managers and private equity executives get on the investment gains they take as compensation. After Ms. Sinema objected, the curb on carried interest was replaced with a 1 percent excise tax on corporate stock repurchases.

Tax experts were already skeptical about the corporate minimum tax, saying companies would be able to maneuver their way around paying it.

“The minimum tax has always been like a 10th-best solution, and when you start taking out more elements, is it now the 12th-best solution?” said Steven M. Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, noting that relatively few companies would now face the new tax. “There may be more government staff dedicated to auditing these companies than there are companies subject to the tax.”

The Joint Committee on Taxation had estimated that the new corporate minimum tax would apply to 150 companies, but that was before more exceptions were added to the legislation. The tax was projected to raise more than $300 billion in new revenue over a decade, but the slimmed-down version is likely to raise just over $200 billion.

“There’s still the issue that companies are going to end up paying little tax under this anyway,” said Kyle Pomerleau, a senior fellow at the American Enterprise Institute.

Mr. Pomerleau also lamented that by taxing book income, Congress was ceding some control over tax policy to the Financial Accounting Standards Board, an independent organization that sets accounting rules. Book income is the profit that companies report to shareholders and investors on their income statements, which are generally governed by those accounting rules.

The new tax is intended to target big companies, like Amazon and Meta, that have for years found ways to lower their tax rates by capitalizing on deductions in the tax code. Tax experts generally favor increasing tax rates — the current corporate rate is 21 percent — or scaling back deductions. But because Republicans were united against that approach, and Democrats did not have enough votes for it, they settled on the corporate minimum tax.

Progressives expressed disappointment after Democrats removed the measure that would have affected businesses that are controlled by private equity and accused Ms. Sinema of being beholden to Wall Street and lobbyists.

“Whatever job she gets with Wall Street after losing her primary, they can’t pay her enough,” Adam Green, co-founder of the Progressive Change Campaign Committee, wrote on Twitter.

The House is expected to pass the Senate bill this week and President Biden to sign it into law soon after. The tax changes would take effect next year, and the Treasury Department would be racing to develop regulations and guidance to interpret parts of the law.

Ms. Sinema said in a tweet on Sunday that she was proud of the outcome of the negotiations, which she said would spur innovation and job creation.

Mark Mazur, a former deputy assistant secretary for tax policy at the Treasury Department, said that the corporate minimum tax was “not the best policy” and that accounting firms were likely combing through the legislation to determine how their clients could avoid the new levy.

“It’s almost an admission that Congress can’t do the right thing and claw back the tax breaks that were given, and so it has to do it in a backdoor way,” said Mr. Mazur, who left the Treasury Department in October and held senior roles in the federal government for nearly 30 years.

Predicting that companies would find new ways to lower their tax bills, he added: “There are options to do things, and you can expect at least aggressive taxpayers to explore those options.”