Senate Democrats for the first time embraced a plan to raise taxes on investment fund manager profits, among other deals made Tuesday with the House that would affect financial services.
Senate Democratic leaders are proposing a 33% effective rate on fund-manager income, which is now taxed at 15%. Their plan is weaker than a proposal passed by the House last month, which would have imposed a 35% rate on fund bosses' carried interest.
The fund-manager tax is part of a $140 billion package to extend jobless benefits and expired tax breaks the Senate started to debate on Tuesday.
In another difference from the House proposal, Senate Democrats proposed a lower, 31% rate for carried interest profits from investments held seven years or longer.
That was done to placate Democratic senators worried about the effect of the tax increase on venture capitalists and real estate partnerships.
Senate Democrats also struck from the House bill a plan to require more fee disclosure to workers who participate in 401(k) retirement plans. Mutual fund companies opposed the plan.
The broader bill would extend unemployment benefits through Nov. 30. It would extend business tax breaks, such as the research credit, for one year. It also prevents a cut in Medicare payments to doctors and includes funding for state and local infrastructure projects.
The Senate will consider additional amendments to the bill. A final vote is not expected until next week or later.
Currently, much of the profits of private-equity, hedge fund, real estate and venture capital fund managers are taxed as long-term capital gains, at a 15% rate. If the Senate deal survives in its current form, it will result in a doubling of tax rates for those fund managers.
President Obama and many congressional Democrats have called for fund-manager pay to be taxed at ordinary income rates, just like wages. The Senate proposal doesn't go that far: starting in 2013 it would tax 65% of carried interest profits at ordinary income rates and 35% at capital gains rates.
That compromise results in an effective tax rate of roughly 33%. For 2011 and 2012, the effective tax rate would be roughly 30% under the Senate plan.
It remains uncertain whether Democratic leaders will be able to round up 60 votes for the package in its current form. They will need at least one Senate Republican to cross party lines, and Sen. Olympia Snowe, R-Maine, the most likely prospect, remains noncommittal.
The sprawling Senate package also includes an increase in taxes on oil production, $1 billion for a federal youth summer jobs program and $4.6 billion to settle lawsuits that black and native American farmers have brought against the government.
About $58 billion of the $140 billion cost of the package is offset by targeted tax increases, including the fund-manager tax and new curbs on the ability of U.S. multinationals to use foreign tax credits.
That means the package would add roughly $82 billion to the deficit over 10 years, compared with $60 billion under the House-passed bill.