Fate of tax on venture capitalists' carried interest still uncertain

A plan to increase taxes on venture capitalists’ earnings is caught up in a larger political battle over a federal jobs bill.

Carried interest, the profit-based quasi-bonus that VC partners earn from their investments, has been taxed at the 15 percent capital gains rate in the past. Congress wants to hike taxes by reclassifying those earnings as regular income. The jobs bill being discussed in the house, H.R. 4213, takes a hybrid approach, with one-fourth of the income taxed as capital gains and three-fourths taxed as regular income. The National Venture Capital Association, an industry lobbying group, opposes this approach too, and estimates that it would average out to a tax rate of 35 percent.

Earlier today, however, H.R. 4213 has was rejected by the “Blue Dogs,” the coalition of conservative Democrats. In a letter to members (which the group sent to VentureBeat after it was published in PEHub), NVCA President Mark Heesen wrote:

There are still efforts being taken by House leadership to whip up enough votes to bring the legislation to the floor.

At this point, it is unclear as to whether that will be possible. If the House does not vote on this bill, the Senate can not act and Congress will recess until June 7th without passing a tax extenders package.

While no single provision brought this bill down, the impact of carried interest tax changes on job creation played a significant role in the thinking of many House Democrats to call on Speaker Pelosi to pull the bill and start over. If the current opposition continues, this will be a substantial victory for the venture capital industry.

Bloomberg has a story covering further developments. Democratic leaders have reportedly trimmed the bill in the hopes of bringing some Blue Dogs back on board. The carried interest tax increases are still part of the proposal.

In his letter, Heesen noted that whatever happens with the current bill, “carried interest will continue to be a target as a revenue raiser.” As he pointed out a few weeks ago, the government is desperate for fresh sources of revenue, and carried interest is the “lowest-hanging fruit.”