Schumer Reverses Course on Tax

WASHINGTON — After signaling for months that he would oppose a tax hike on private equity and hedge fund managers, Senator Schumer now says he will propose a bill that does just that.

Mr. Schumer, the third-ranking Democrat in the Senate and a member of the Finance Committee, said yesterday that his tax plan would raise the current 15% rate on "carried interest" profits for firm managers in several industries, including private equity, venture capital, real estate, and for oil and gas companies.

The proposal would be a much broader version of a House bill that increases the tax on carried interest only for hedge fund and private equity managers. Mr. Schumer had opposed that on the grounds that it would unfairly single out Wall Street and hurt New York's economy.

"My intent is to raise the most revenue and do it in a fair way," Mr. Schumer told Bloomberg News yesterday. "My bill will certainly raise the taxes on people who now get 15% for carried interest, for sure."

"My view is you should treat everyone across the board," he added.

He would not provide details on the bill, such as how high he would raise the rate. The House proposal, backed by Rep. Charles Rangel of Harlem, would tax carried interest at the current ordinary income rate of 35% instead of at the lower capital gains rate.

Mr. Schumer was tight-lipped later yesterday afternoon when asked about his proposal. "You'll have to wait and see," he said. He did not disclose when he would introduce the bill, saying only: "We're working on it."

There are no current revenue estimates for proposals to raise the carried interest rate, although Mr. Schumer's plan would generate substantially more cash than the narrower House bill.

While Mr. Schumer has long supported raising taxes on top earners to pay for Democratic priorities like expanded health coverage, increased education spending, and a repeal of the alternative minimum tax, he has resisted moves that would damage Wall Street, the engine of the state economy as well as a key source of his campaign contributions.

Yet industry officials yesterday said they were not surprised that the senator will propose a tax plan that includes increases for hedge funds and private equity managers, pointing to his carefully worded statements at Senate Finance Committee hearings this summer as clues.

"Most of us don't enjoy raising taxes," Mr. Schumer said at a July 31 hearing, "but if we have to raise taxes on the wealthiest Americans to pay for other priorities or AMT relief, we should strongly consider doing it for everyone, not just one industry."

His proposal is certainly not likely to quell industry criticism. "If all it is doing is increasing the number of constituents that will be affected, then it will also likely increase the opposition to it," a New York attorney with Jones Day who represents private equity firms, Robert Kennedy, said.

Indeed, some have speculated that a broad proposal from Mr. Schumer would face so much resistance that it would kill the effort to raise carried interest taxation altogether.

If it backfires, Mr. Schumer's gambit also could irritate Mr. Rangel, the House Ways and Means chairman who is preparing what he calls "the mother of all tax reform." Mr. Rangel has bristled at Senate tax proposals, reminding his upper chamber colleagues that the Constitution gives the tax-writing responsibility to the House.

In his interview with Bloomberg News, Mr. Schumer acknowledged that his bill would have little chance of success until 2009, because even if a Democratic Congress passed the legislation, President Bush would almost certainly veto it.

A spokesman for the industry's lobbying arm in Washington, the Private Equity Council, declined to comment on Mr. Schumer's proposal, saying only that the council's position remains that the current tax treatment on carried interest should be left alone.

The president of the National Venture Capital Association, Mark Heesen, warned that a tax hike could hurt small start-ups and stifle innovation. "We're investing in exactly the areas where Congress said we need to go," he said, pointing to growth in the clean technology, life science, and information technology sectors.

A spokesman for the Republican National Committee, Danny Diaz, denounced Mr. Schumer's effort, saying it was one in a "flurry of dramatic, across-the-board tax increase proposals" that Democrats have offered recently. "The difference between our parties becomes more clear with every passing day," Mr. Diaz said. "The Democrats believe the American people should live on less; Republicans believe the government must live on less."

Also yesterday, Mr. Schumer and a bipartisan coalition of lawmakers announced a bill to establish a $500 investment account for every American child, along with an annual $500 matching contribution of children in households earning below the national median income. The plan would cost $4 billion a year, but Mr. Schumer was quick to distance it from a "baby bond" proposal floated last week by Senator Clinton. That proposal, which would give $5,000 to every child at birth, was loudly denounced by Republicans.

"This is not baby bonds," Mr. Schumer told reporters. "This has been around for a while." He noted that he supported a similar measure with a former Republican senator from Pennsylvania, Rick Santorum, whom he later helped defeat in a re-election bid last year.