On October 10, Representative Matt Cartwright (D-PA) introduced the Bill Pascrell Ending Tax Giveaway Act with the goal of “closing the controversial carried interest loophole.” 

The “carried interest loophole,” which allows investment fund managers to benefit from preferential long-term capital gains rates on what is effectively compensation for services, has been targeted by some members of Congress for years now.  The Tax Cuts and Jobs Act (“TCJA”), enacted in the first Trump Administration, whittled away at the carried interest preference by extending the previous one year asset holding period to three years.  Final regulations implementing the three year holding period were issued in January 2021 (which we discussed here).

Rep. Cartwright’s recently introduced bill would eliminate the carried interest preference altogether (with limited exceptions) by classifying certain net capital gains from an investment services partnership interest as ordinary income. The bill would also raise penalties for tax underpayments if investment services partnership interests are not treated as ordinary income and mandate that income from these interests be included when calculating self-employment tax obligations.  In addition, the bill would include in gross income the fair market value (defined as liquidation value) of any partnership interest received in exchange for services.

The impact that the election results will have on the effort to close the carried interest loophole remains to be seen. Rep. Cartwright recently lost his reelection bid.  His proposal tracks a bill that was introduced in the Senate last April by Senators Sherrod Brown (D-OH), Tammy Baldwin (D-WI) and Joe Manchin (I-WV).  Of these three, only Senator Baldwin (who appears to have won her race) may be in the Senate come the new year, with Senator Brown also having been defeated and Senator Manchin retiring.  However, the effort to close the carried interest loophole has historically been a bipartisan affair, so a full Republican Congress will not necessarily save it, especially with the populist winds blowing.  Indeed if, as anticipated, Congress attempts to extend many of the tax cut provisions of the TCJA, it may prove a tempting target to help pay for those extensions, as eliminating it is estimated to be worth $11.5 billion in additional revenue over a ten year period.