Carried Interest Proposal Continues to Concern LIHTC Supporters

Published by Michael Novogradac on Friday, February 3, 2012 - 12:00am

Last month Ways and Means Committee Ranking Member Sander Levin announced he would reintroduce legislation to change the taxation of income from carried interests. He authored similar legislation twice before, in 2007 and 2009.

In a statement about his plans, Rep. Levin suggests that investment managers such as private equity managers benefit from a loophole that allows them to pay a reduced 15 percent tax rate on income from carried interests, rather than federal income tax rates up to 35 percent. The change has passed the House of Representatives four times as part of broader measures since Rep. Levin first introduced it in 2007, but it has yet to pass the Senate.

The current reprise of the carried interest proposal was sparked, at least in part, by Republican Presidential candidate Mitt Romney’s statement that his effective tax rate is probably close to 15 percent. In a written statement on January 18, Rep. Levin said, “Gov. Romney’s statement that his tax rate is close to 15 percent likely reflects that he has benefited from a loophole that we have been trying to close for years.” On January 23, Romney released his tax returns to the public and the Washington Post reports his effective tax rate in 2010 was 13.9 percent.

However, the National Multi Housing Council warns that, if enacted as proposed, Rep. Levin’s proposal to change the taxation of income from carried interests would have substantially greater consequences than just raising income taxes for hedge fund managers. Specifically, NMHC warns that the proposal would significantly reduce the ability to develop or rehabilitate rental housing.

Last week, the National Multi Housing Council was one of 17 organizations that co-signed a letter of opposition to Rep. Chris Van Hollen, who has proposed raising the tax on income from carried interests to pay for the extension of the payroll tax holiday. In the letter the groups argue that while much discussion about changing the tax on income from carried interests focuses on its effect on hedge fund managers, the tax increase would directly hit commercial real estate. The letter reports that 46 percent of all investment partnerships in the U.S. are real estate partnerships, and that the vast majority of those use a carried interest structure. As such, the groups argue that a change in the tax treatment of income from carried interests would be a tax increase on commercial real estate.

Because of the potential implications for affordable rental housing, the affordable housing community should monitor these carried interest proposals closely and continue to assess the effect they would have on the development and preservation of affordable housing.