Venture-capital, real estate lobbies look for carve-out

The venture capital and real estate lobbies are pushing for changes to a proposed tax hike on fund managers’ carried interest that would effectively shield their industries from harm.

Though the groups are not working together, they both want Rep. Charles Rangel (D-N.Y.), the chairman of the House Ways and Means Committee, to give special treatment for their industries in the legislation, which he is expected to mark up on Thursday.

{mosads}“Our view is that every industry should be talking about the arguments they have in their arsenal,” Mark Heesen, the president of the National Venture Capital Association, said.

He enumerated the ways that lawmakers could exclude venture capitalists, arguing that they don’t contribute much to the revenues raised by the tax change anyhow: “The amount of money that could come from venture capitalists is not that large.”

Steve Renna, vice president and senior counsel of the Real Estate Roundtable, noted similarities between his sector and the venture capital industry: “Like venture capital, real estate is a long-term asset.”

 He said that limiting the tax increase to only those deals lasting longer than three to four years would protect his industry: “Real estate investments are held for seven, eight or nine years on average.”

Carried interest is used widely in the private equity industry to compensate fund managers, but it is also used in the venture capital and real estate sectors.

Carving out these sectors from a proposed tax hike on carried interest could reduce resistance to Rangel’s tax proposal and also strike a blow to the broad-based business coalition fighting it.

On Thursday, Rangel is expected to introduce a manager’s amendment containing the carried interest measure and attach it to legislation shielding taxpayers from the Alternative Minimum Tax (AMT) for one year at a cost of $50 billion. Increasing taxes on all fund managers’ carried interest from the 15 percent capital gains rate to ordinary income rates as high as high as 35 percent is expected to raise $25.7 billion over 10 years.

However, the provision could be dropped in favor of other pay-fors.

Democratic panel members have been discussing whether to tweak the measure to lessen its impact on certain sectors. But doing so would reduce the potency of the revenue-raiser.

“What I would like to see is some ability to single out activity that otherwise wouldn’t happen but for the preferential tax treatment,” said Rep. Artur Davis (D-Ala.), a panel member who is also a member of the pro-business New Democrat Coalition. “My guess is you’re likely to find that activity in the venture capital world.”

He added that he and others on the panel were arguing to the chairman that “there are different species of carried interest.”

Rep. Mike Thompson (D-Calif.), a panel leader and longtime member of another pro-business group, the Blue Dog Coalition, acknowledged that members were negotiating to narrow the scope of the tax increase. But he stayed mum on the details.

“I think that’s what folks are looking at: some sort of compromise,” Thompson said.

Renna said the real estate industry was discussed at a meeting of Democratic committee members on Tuesday.

Heesen, of the venture capital group, said his members could be shielded from the tax increase in a variety of ways. For example, the bill could impose the higher tax rate only on larger deals, short-term investments in more mature businesses or deals loaded up with debt, he said. Venture capitalists typically provide relatively small amounts of financing for start-ups and hold them for at least three to seven years, Heesen said.

By contrast, private equity firms often invest in established businesses, rely heavily on debt financing and sell off companies more quickly. According to Thomson Financial, the average hold period for companies owned by private equity firms before going public in the first half of 2007 was six years.

The Private Equity Council, which represents a handful of private-equity firms, did not comment by press time.

Heesen said the National Venture Capital Association has been leveraging an extensive network of entrepreneurs that have benefited from the seed financing of its members. On Monday, it sent a letter to lawmakers signed by 500 entrepreneurs arguing that increasing taxes on the venture capital industry would hurt the economy.

Heesen said that the group also benefited from long-term relationships on Capitol Hill, cultivated over three decades.

“We’ve been doing research reports for years on the impact of [the] venture capital industry. We represent jobs, and jobs are important in people’s districts,” he said.

The push to exclude certain sectors could make the fight against the tax increase more difficult. Unlike the real estate group, the venture capital group never joined a coalition started by Rep. Eric Cantor (Va.), a Republican leadership member, and Rep. Tom Reynolds (R-N.Y.) to rally against the carried interest legislation.

Cantor disapproved of the strategy. “Folks who are attempting to get a carve-out are fooling themselves if they think they won’t get hit down the road. That’s why I’ve been encouraging everyone to take an unabashed policy stance on this,” he said.

One lobbyist predicted that an exclusion for venture capital, real estate or both would ultimately help Rangel pass the legislation: “Once the impact of his bill leaves certain sectors unharmed, those groups will turn around and support the bill.”

Renna of the Real Estate Roundtable argued that limiting the provision to longer-held investments wouldn’t necessarily leave private equity firms in the cold because they could respond by holding their investments for longer.

But he acknowledged that narrowing the scope of the tax increase to exclude his industry would decrease the revenue it would raise.

“What would it do to the revenue? I don’t know,” he said. “I don’t doubt at all that a significant part of the revenue comes from real estate.”