- Sen. Kirsten Sinema reached an agreement Thursday to support the Inflation Relief Act of 2022.
- The interest tax provision was removed from the bill.
- The provision was intended to close a loophole that allowed wealthy investors to pay lower taxes.
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Sen. Kirsten Sinema of Arizona has agreed to support the Inflation Relief Act of 2022, meaning the bill now has the support of all 50 Democrats in the US Senate.
Her support came with the elimination of the interest tax provision, a small part of the bill that was aimed at tax breaks for the wealthy.
“We agreed to eliminate the carried interest tax provision, protect advanced manufacturing and boost our economy with clean energy in the Senate’s budget reconciliation legislation,” Sinema said in a statement Thursday.
This represents a momentary gain for some of America’s wealthiest people. The provision targets a loophole that could be used to cut taxes for hedge fund managers and other people who manage money for a living. When fund managers make money for their clients through their investments, they get a share of those profits. They are entitled to classify this payment as capital gains, which are subject to lower tax rates than wages and bonuses. By removing the provision, fund managers have avoided the restrictions that would have made it difficult for them to continue paying the same low tax rates on their income.
Both Republicans and Democrats have advocated eliminating the tax breaks since they were brought to the attention of Congress in 2007 by a journal article by a law professor. So far they have not managed to close the loophole.
The Trump-era policy added a caveat to the loophole through a three-year holding period, meaning private equity funds must hold their portfolio companies for at least three years before pulling out.
The Inflation Reduction Act provision would have extended that hold period to five years – meaning that even if it had survived discussions with Sinema, it would not have closed the loophole completely.
According to a 2021 report by financial software company eFront, the average holding period for a private equity fund in 2020 is now 5.4 years.
Still, the interest tax provision is a relatively small part of the Inflation Reduction Act. Lawmakers estimated the provision would generate about $14 billion over the next 10 years, compared to a total of $790 billion they say would be produced as a result of the bill.
Senate Majority Leader Sen. Chuck Schumer also reiterated Thursday that the bill still includes a new hard floor on the taxes America’s largest corporations must pay.
“The agreement preserves key components of the Inflation Reduction Act, including reducing prescription drug costs, fighting climate change, closing tax loopholes used by large corporations and the wealthy, and reducing the deficit by $300 billion,” said Sumer. The final version of the bill will be published on Saturday, he added.
President Joe Biden on Thursday night praised Sinema’s collaboration as “another critical step toward reducing inflation and the cost of living for America’s families.”
Sinema’s opposition to the provision left open the possibility that she or Sen. Joe Manchin of Virginia — who agreed to a surprise deal on the bill last week — could change the Deflation Act because of it. Both lawmakers helped stop President Joe Biden’s Build Back Better plan.
But the two disagree about carried interest, a tax loophole that allows wealthy investors and hedge fund managers to pay less in taxes. While closing the loophole is a priority for Manchin, Sinema opposes eliminating the tax breaks.
Sinema’s announcement on Thursday confirmed that her concerns about the bill had prevailed and that the provision would be watered down.
Manchin and Sinema did not immediately respond to Insider’s requests for comment.
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