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Kyrsten Sinema delivers a 'gift to private equity' in Democrats' big agenda bill

In the final stretch, the Arizona centrist secured two big changes to the Inflation Reduction Act affecting investment funds, including preserving the "carried interest" tax break.
Sen. Kyrsten Sinema, D-Ariz., arrives at the Capitol for a vote on Aug. 3, 2022.
Sen. Kyrsten Sinema, D-Ariz., arrives at the Capitol for a vote on Aug. 3.Drew Angerer / Getty Images

WASHINGTON — As Senate Democrats stood on the brink of passing a sweeping climate and health care bill, Sen. Joe Manchin, D-W.Va., forced Sen. Kyrsten Sinema to do something she had managed to avoid for more than a year: take ownership of protecting a controversial tax break that benefits wealthy investment managers.

The Inflation Reduction Act, released July 27 after an unexpected deal between Manchin and Senate Majority Leader Chuck Schumer, D-N.Y., blindsided Sinema, D-Ariz. It included a policy she had quietly objected to — limiting what critics call the “carried interest loophole,” which lets private equity managers pay a much lower tax rate on their earnings than most people do on ordinary income.

Lobbyists sprang into action. Sinema stayed silent for about a week, making some Democrats nervous that she might torpedo the entire bill. Behind the scenes, she was fighting to protect the $13 billion tax break. And she succeeded, with Schumer ultimately releasing a revised version of the package to win her critical vote.

"We have agreed to remove the carried interest tax provision," Sinema said in her Aug. 4 statement announcing her support.

Sinema also secured a change to the 15% corporate minimum tax under the Manchin-backed legislation that would exempt entities owned by private equity funds, which estimates project would save the industry $35 billion.

The changes are “certainly a gift to private equity and investment funds,” said Kim Clausing, a former Treasury Department official who worked on tax analysis and helped develop the Biden administration’s positions from 2021 to this June. 

The preservation of carried interest break stands out, particularly as Joe Biden is the third consecutive president to have called for its elimination. The tax break is now poised to survive its second major tax overhaul by the two parties in five years after some modest limitations in the 2017 Republican tax law.

“Those special interests get special tax treatment because they find susceptible politicians who accept their arguments,” Clausing said. “In this case Sinema.”

Apart from the last-minute changes, Sinema’s long-standing objection to raising tax rates on upper earners and corporations means the Democratic bill would largely preserve the Trump tax cuts of 2017, known as the Tax Cuts and Jobs Act, or TCJA, even though Biden ran on undoing them.

“This bill largely preserves the TCJA,” said Kyle Pomerleau, a senior fellow who studies tax policy at the conservative American Enterprise Institute.

In response to questions from NBC News about why she favors the carried interest tax break and opposes rate increases, Sinema spokesperson Hannah Hurley said in an email the senator “makes every decision based on one criteria: what’s best for Arizona.”

“She has been clear and consistent for over a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness,” Hurley said. “At a time of record inflation, rising interest rates, and slowing economic growth, disincentivizing investments in Arizona businesses would hurt Arizona’s economy and ability to create jobs.”

‘Showing her true colors’

The bill passed 51-50 on Sunday, with Vice President Kamala Harris breaking the tie. It is expected to pass the House on Friday. Overall, Clausing and many Democrats said, it’s a strong bill that would beef up corporate taxes, mitigate climate change and fund health care.

The American Investment Council, which lobbies for private equity, took credit for saving the tax break, saying its team “worked to ensure” that lawmakers “understand” the upsides of current law.

“Our advocacy helped prevent punitive tax increases that would make it harder for investors to continue to support jobs, small businesses, and pensions in every state,” the group’s president and CEO, Drew Maloney, said in a statement.

Other experts see carried interest as a special perk for wealthy fund managers and say eliminating it would have little impact on the economy.

“I don’t really get the argument at all for why people who work for a living and earn their living by doing investing for other, very wealthy people should pay taxes at half the rate that the rest of us do,” Larry Summers, the former Treasury secretary who held powerful positions in the Clinton and Obama administrations, said Wednesday on MSNBC. “That just seems wrong to me, and that’s the effect of the carried interest loophole.”

Summers, a business-friendly moderate who was heavily critical of Democrats’ American Rescue Plan last year, said the preservation of carried interest wasn’t an “inspiring” example of democracy at work. He suggested its survival was less about merit and more about “campaign contributions received by some of the major actors here.”

A Financial Times analysis found that Sinema has gotten more than $500,000 in campaign contributions from executives of private equity groups during the 2022 election cycle.

In lieu of the revenue from carried interest, the Sinema-backed version included a 1% excise tax on stock buybacks. She also secured the addition of $4 billion in drought relief funding, which numerous Democrats in western states have since touted.

Samantha Jacoby, a senior tax legal analyst at the Center on Budget and Policy Priorities, a liberal-leaning think tank, said it's "especially appalling there was a special carve-out after the carried interest provision fell out of the bill." She said it "further shows the power of private equity as a special interest group and their ability to lobby for benefits, even in the final hours."

Sinema’s move has also drawn criticism from progressives in Arizona who were already eying a Democratic challenge in 2024, when she would be up for re-election.

“She is showing her true colors,” said Luis Ávila, a community organizer in Phoenix and volunteer with the group Primary Sinema.