Kyrsten Sinema Is Demanding Democrats Keep A Tax Break For The Super-Wealthy

Reports say the Arizona senator is protecting the carried interest loophole.

Sen. Kyrsten Sinema (D-Ariz.) wants Democrats to drop a provision tightening a tax loophole associated with hedge fund managers and private equity executives from their $740 billion package enacting President Joe Biden’s climate, health care and tax plans, according to reports from Politico and Axios.

Sinema’s apparent desire to nix the provision — which raises just 2% of the proposal’s total revenue and does not even fully close the loophole — does not immediately endanger Democrats’ hope of passing the legislation out of the Senate in the coming days. But it shows how the moderate first-term senator is willing to protect some of the country’s wealthiest Americans from even small tax hikes.

Sinema’s office would not directly confirm nor deny the reports, and said the senator is still reviewing the legislation and awaiting rulings from the Senate parliamentarian on its contents. Politico and Axios also reported Sinema wants additional funding for drought resiliency — a key priority for Arizona, where water supply remains a top issue.

The carried interest loophole is infamous. It allows hedge fund managers and venture capitalists to have their income taxed at the 15% capital gains rate instead of at much higher income tax rates, often saving them millions of dollars a year. Wall Street has worked ferociously to defend the loophole over the course of the past decade, ensuring its survival despite pledges from Presidents Barack Obama and Donald Trump to eliminate it.

Sen. Kyrsten Sinema (D-Ariz.) leaves her office to walk to the Senate Chambers in the U.S. Capitol Building on Aug. 2 in Washington, D.C.
Sen. Kyrsten Sinema (D-Ariz.) leaves her office to walk to the Senate Chambers in the U.S. Capitol Building on Aug. 2 in Washington, D.C.
Anna Moneymaker via Getty Images

The loophole is now most closely associated with the private equity industry, where it applies to the 20% of a fund’s investment profits that its managers take in on top of a fixed fee. If Democrats close the loophole, managers will instead pay the top marginal income tax rate of 37%.

Democrats’ existing proposal, agreed to by Sen. Joe Manchin (D-W.Va.) and Senate Majority Leader Chuck Schumer (N.Y.), would not eliminate the loophole. It would instead require managers to hold investments for five years instead of three years to get the more favorable rate, and create stricter requirements for those investments.

Manchin and Schumer’s proposal would raise just $14 billion over the next decade, while a plan from Sens. Ron Wyden (D-Ore.) and Sheldon Whitehouse (D-R.I.) to completely close it would’ve raised $70 billion.

Still, even the modest proposal appears important to Manchin.

“On the carried interest — for the wealthiest one-tenth of 1% of Americans to take advantage of a tax break for them, that they have no risk at all and they get to take the lowest tax rate?” Manchin told a local West Virginia radio host last week. “So we got rid of that.”

On Wednesday, Manchin said he wanted an explanation from Sinema.

“I just want someone to explain. I can’t understand it,” he told Fox News of her reported opposition. He did not suggest tightening the loophole was make-or-break: “I’m sure [Sinema] has a reason, and I want to hear more about it.”

Sen. Elizabeth Warren (D-Mass.), perhaps the Senate’s leading proponent of taxing the wealthy, has worked with Sinema to craft compromise proposals in the past.

“Americans understand that the tax code has been twisted and manipulated to protect the richest among us, and they’re sick of it,” she told HuffPost. “Narrowing the carried interest provision is something that makes the code just a little fairer. And we should hang on to it.”

The overall package gets most of its cash from stricter IRS enforcement, and from instituting a 15% corporate minimum tax, which aims to block large companies from zeroing out their tax bills with credits and deductions. It spends about $300 billion reducing the deficit, and $370 billion on clean energy and climate change projects. It also gives Medicare the power to negotiate lower prices for prescription drugs and funds subsidies for Obamacare.

On Tuesday, Sinema discussed the legislation with the Arizona Chamber of Commerce and the National Association of Manufacturers, two groups who oppose all of the tax hikes in the legislation.

Her business-friendly positioning has paid dividends for her campaign account: In 2021 alone, she received more than $144,000 in donations from industry groups that lobbied against closing the carried interest loophole. More recently, she took in $100,000 from Wall Street and $50,000 from pharmaceutical companies in the second quarter of 2022 alone.

“We can only assume that she’s been motivated by the money they’re donating to her campaigns,” one former Sinema staffer, speaking on condition of anonymity because they still work in Democratic politics, told HuffPost. “I knew she was always trying to be an atypical Democrat. She wants to be Arizona’s new maverick. I never thought she would just toe the party line. But throwing away campaign promises you made and snubbing your nose at the people who got you elected, that makes you the opposite of a maverick. It makes you a corporate shill.”

Igor Bobic contributed reporting.

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