When the centrist Democratic senator Kyrsten Sinema gave the green light this week to move forward with the much-slimmed-down version of her party’s long-awaited climate and tax bill, her colleagues breathed a sigh of relief.
However, Sinema’s assent came with a notable proviso: scrapping the promise to end a notorious tax loophole allowing private equity and hedge fund managers to lower their tax bills.
At first sight, the decision to insist on keeping a provision that benefits some of America’s wealthiest people seems a far cry from the concerns of voters in Sinema’s southwestern home state of Arizona.
However an FT analysis shows that the senator is a beneficiary of significant contributions from the private equity industry — whose lobbying machine and political influence have grown increasingly powerful over the past two decades.
According to Federal Election Commission filings, Sinema has received more than half a million dollars in campaign donations from private equity group executives in this election cycle alone, representing about 10 per cent of her fundraising from individual donors. This includes individual donations totalling $54,900 from executives at KKR, $35,000 from Carlyle, $27,300 from Apollo, $24,500 from Crow Holdings Capital and $23,300 from Riverside Partners.
Sinema is not the only Democrat to have received funds from the private equity industry. Executives at groups including Blackstone, KKR and Lazard have also collectively donated $1.28mn to New York Senator Chuck Schumer, the top Democrat in the Senate, representing about 4.4 per cent of his fundraising from individual donors this cycle.
A spokesperson for Schumer said he was “a longtime champion of closing the carried interest loophole”, adding he had “worked until the very end to try to keep the provision in the legislation and will continue to seek opportunities to eliminate it”.
A spokesperson for Sinema said she had been “clear and consistent for more than a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness”.
“At a time of record inflation, rising interest rates, and slowing economic growth, disincentivising investments in Arizona businesses would hurt Arizona’s economy and ability to create jobs,” the spokesperson said.
Sinema, who wields outsize influence in a Senate split 50/50 along party lines, has been a frequent obstacle to Democrats’ legislative plans, refusing to back various past iterations of the Build Back Better bill, now renamed the Inflation Reduction Act.
Following days of heated negotiations, this week Sinema agreed to “move forward” with the passage of the legislation, after the removal of the proposal to extend the holding period for investments eligible for carried interest tax treatment from three years to five.
The so-called carried interest provision has survived a succession of attempts to remove it over the past 15 years, with former presidents Barack Obama and Donald Trump both promising to do so during their campaigns.
The loophole began attracting headlines in 2007, when a tax law professor pointed out in an academic journal that a “quirk” in US tax law allowed some of America’s richest people to “pay tax on their labour income at a low rate”.
It was seriously threatened in 2010 and 2017, when Democrats and then Republicans tried to alter or remove it, but each time it escaped a political crackdown.
Analysts attribute the survival of the controversial tax break — seemingly against the political odds — to its relatively low public profile and the success of private equity’s increasingly sophisticated lobbying operation in Washington.
“A lot of issues like this never get fixed and never go away, in large part because they’re great fundraising issues for politicians,” said James Lucier, an analyst at Capital Alpha Partners.
“My friends on K Street call them ‘evergreens’,” Lucier added, referring to the Washington DC street on which lobbying firms are typically based. “These are issues that never get solved, because they’re just so great for fundraising.”
Democrats estimated that their proposal to close the carried interest loophole would raise a relatively modest $14bn in revenue. However the tax provision is worth large sums to the personal fortunes of investment executives.
“There’s a real asymmetry there,” said Andrew Park, a senior analyst at the non-partisan Americans for Financial Reform group.
“This loophole represents a lot of cash for individual private equity executives personally, so they put money into fighting to preserve it,” said Park. “But it doesn’t raise a massive amount of money, by US government standards, so lawmakers often look to other sources.”
Private equity executives at Blackstone stood to receive close to half a billion dollars in carried interest-based pay as of the end of last year, assuming their investments were sold at their year-end 2021 value, according to filings analysed by the FT.*
While the proposal to close the carried interest provision is politically popular among voters, according to political consultancy Beacon Policy Advisors, it is not a charged enough issue to actually change voting patterns.
“Carried interest is the epitome of tax lobbying,” said Ben Koltun, director of research at Beacon. “There are some taxes that a lot of people care a little about, but a few people care a lot about.”
“Eliminating carried interest is popular in the polls,” he added. “But no politician is going to win or lose an election because of carried interest.”
*This article has been amended from the original to reflect that Blackstone executives stood to receive close to half a billion dollars in carried interest-based pay as of the end of last year.