Carried-Interest Tax Break Shrinks, Survives in Democrats’ Plan

House Democrats want to restrict the use of a prized private-equity tax break to help fund President Joe Biden’s economic agenda, but their proposal falls short of eliminating the carried-interest provision criticized by some members from both political parties. 

The plan, released Monday by the Ways and Means Committee, would generally require investment funds to hold assets for more than five years -- up from three years -- in order for managers to get a preferential tax rate on their share of the fund’s profits, known as carried interest. 

Assets that meet the holding-period requirement are subject to the smaller long-term capital gains tax rate, rather than the rate for ordinary income.

Under the committee’s proposal, the capital gains rate would top out at 28.8%, after adding in a Medicare surtax. The top individual rate would be 39.6%.  

The proposed carried-interest change would include some exceptions, retaining the three-year holding period for real property trades or businesses and taxpayers earning less than $400,000. It would also extend the carried-interest rules to all assets eligible for long-term capital gains rates.

Biden’s Proposal

The Ways and Means proposal is a watered-down version of the plan laid out by the Biden administration in May, which would have eliminated the tax perk for investment fund managers if their overall taxable income exceeded $400,000. 

If enacted, the Ways and Means proposal would go into effect in 2022.

The Congressional Budget Office has estimated that taxing carried interest as ordinary income would raise $14 billion over a decade. The Ways and Means Committee in an informal estimate claims the same amount of savings from its proposed change. 

The most recent attempt to address carried interest was in 2017, under then-President Donald Trump. The Republican tax overhaul fell short of doing away with the benefit altogether, leaving it intact for investments that are held for at least three years.

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