The U.S. Senate is about to take up President Obama’s proposal to change the way carried interest is taxed. If Congress goes along with the president’s plan, taxes on carried interest would double-and the real estate industry in New York City and elsewhere would see recovery come to a grinding halt. The tax hike should be abandoned.
Carried interest is most associated with compensation packages for hedge fund managers, a group that has borne the brunt of the public’s anger since the economy tanked. Carried interest refers to the incentive fees that managers collect when their funds earn high profits. Carried interest is taxed not as income, but as a capital gain. Under the proposal before Congress, carried interest would be subject to income tax, in effect more than doubling the tax rate, from 15 percent to 35 percent.
While this tax is unwise on its face, it also would be catastrophic for the real estate industry. More than 50 percent of revenue from the carried-interest tax comes not from the world of hedge funds, but from real estate entrepreneurs who earn fees from profitable investments. The real estate industry has proposed a reasonable compromise that would ensure that carried interest from properties held for three years or more would continue to be taxed as a capital gain, not as income.
Politicians who deal with the real-world consequences of federal policy understand that this tax increase would wreak havoc on the local level. That’s why the U.S. Conference of Mayors-a bipartisan group-is urging Congress to reject the massive increase. The mayors noted that the hike would have a disproportionate impact on the real estate industry, endangering an already precarious recovery in the nation’s largest cities.
Punitive taxation may make demagogues happy, but it solves nothing. Congress should act accordingly.