Cantor Rallies Business Groups Against Tax Plans

Posted June 26, 2007 at 6:31pm

As pressure develops in both chambers to raise taxes on private equity firms and other partnerships, one key Republican is joining forces with the business community to fight back.

Rep. Eric Cantor (R-Va.), the Chief Deputy Minority Whip and a member of the tax-writing Ways and Means Committee, has formed the Coalition for the Freedom of American Investors and Retirees to put the brakes on legislation that would hike the tax rates on private equity firms that go public and on some income collected by business partnerships.

Cantor is planning the coalition’s first meeting at 4:30 p.m. today in the Whip’s conference room. K Street and Congressional sources said representatives from as many as 40 outside groups would attend, including the U.S. Chamber of Commerce. Representatives for private equity giant Blackstone Group as well as the Private Equity Council have been invited and were expected to show up.

“From our perspective, this is a pretty sweeping, broad tax hike that gets right at capital gains,” said David Hirschmann, president of the chamber’s Center for Capital Markets Competitiveness. “I think Members of Congress will be surprised about how many industries use the partnership structure to get capital to grow new businesses.”

Cantor’s move is helping solidify his position as a go-to person in the fast-emerging fight over taxes. It could be a lucrative stand. Already, Cantor has a huge fundraising base in the financial services sector, whose political action committees are among the largest donors to Cantor’s coffers for the 2008 election cycle.

In an interview, Cantor said he’s heading up the coalition to “make sure that we get educated on the real impact” of bills in both the House and Senate. “The bottom line is, if we want to be about capital formation and job creation, this is just not the direction to go in,” he said. “From my standpoint, there is just an insatiable appetite for spending in Washington.” That desire for spending has caused Members to look for new tax revenue, he added.

A Cantor aide said her boss previously has been involved in coalitions to help pass trade bills and other legislation with the Whip team.

Cantor is focusing on a Senate measure sponsored by Finance Chairman Max Baucus (D-Mont.) and ranking member Chuck Grassley (R-Iowa) that would increase the taxes paid on private equity firms that go public. That bill was dropped, at least in part, in reaction to the initial public offering of the Blackstone Group, whose CEO’s lavish lifestyle has attracted attention.

Cantor also is working against a bill in the House, sponsored by Rep. Sander Levin (D-Mich.), that would increase the tax rates on “carried interest.”

Carried interest is the percentage cut that private equity firms, or other partnerships, pocket after profitable deals. Such money currently is taxed at the 15 percent capital gains rate, but Levin and others in Congress say they want to increase that to the income rate closer to 35 percent.

While proponents say it’s unfair for wealthy investors to pay the lower 15 percent rate, Cantor argued that the change would hurt middle-class investors, “the average blue-jean wearing American,” and pension funds, which are heavily invested in private equity funds.

“Right now, the most important thing we can do is to stop the attempt to raise taxes on innovation and opportunity in America,” Cantor said. “That’s the reason why we’re getting this coalition together. We want to be about opportunity in this country, we don’t want to be squelching innovation.”

Levin defended his proposal. He said it’s unfair for the partners of private equity firms, hedge funds or other partnerships to pay the capital gains rate for their work on a deal, while other American workers pay higher income rates.

“The bill is about tax equity,” he said. “There is no sound rationale for taxing those services differently than those services provided by millions of other Americans who pay ordinary income tax.”

Levin said Ways and Means Chairman Charlie Rangel (D-N.Y.) will hold hearings next month on the issue.

“I expect that there will be a lot of lobbying, but what I ask everybody, including the lobbyists, to answer is: How do you justify this? Where’s the fairness? Where’s the equity?” Levin said. “I need to look straight in the eye of constituents.”

But lobbyists working the issue say that average constituents’ investments would be harmed by higher tax rates.

Among the lobbyists expected to attend today’s coalition meeting organized by Cantor are Ashley Miller from the U.S. Chamber of Commerce; Jeff DeBoer, CEO of the Real Estate Roundtable; Sam Geduldig and Steve Clark of Clark & Associates, whose clients include the chamber, Investment Company Institute and the American Bankers Association; and Dan Gans from Polaris Government Relations, among others.

“Cantor recognizes that of all the ideas that Democrats have had thus far — and some of them would have tremendous negative impacts on the economy as a whole — probably none would be more detrimental to the entire economy than to tax private equity retroactively,” Geduldig said. “It would do incredible damage to the investment community, the American economy and to the country. It would have collateral damage to middle-class investors, union employees who are invested in pension funds, and would have ripple effects across the entire spectrum of American investors. Cantor deserves tremendous credit for recognizing the potential fallout and organizing a proactive solution.”

Another lobbyist said that Cantor “is sort of cautious about what issues he gets involved in, but when he does, goes full bore. He’s legitimately concerned that if some of these proposals were to become a reality, they could have a crippling effect.”

DeBoer said he intends to attend today’s meeting to “hear what Mr. Cantor’s concerns are and the focus of the group.” He added that he wants to make sure Members fully understand what the proposals would do to the economy.