- Senator Kyrsten Sinema reached an agreement on Thursday to support the Cut Inflation Act of 2022.
- A deferred interest tax provision has been removed from the bill.
- The provision was intended to close a loophole that allows wealthy investors to pay less tax.
Senator Kyrsten Sinema of Arizona has agreed to support the Cut Inflation Act of 2022, meaning the bill now has the support of all 50 Democrats in the US Senate.
His cooperation came with the removal of a deferred interest tax provision, a small part of the bill that targeted tax relief for the wealthy.
“We agreed to remove the deferred interest tax provision, protect advanced manufacturing and boost our clean energy economy in the Senate budget reconciliation legislation,” Sinema said in a statement Thursday.
It represents a momentary victory for some of the wealthiest people in America. The provision targets a loophole that can be used to reduce taxes for hedge fund managers and others who manage money for a living. When fund managers earn money for their clients through their investments, they receive a share of those profits. They are allowed to classify this payment as capital gains, which are subject to lower tax rates than paychecks and bonuses. With the provision removed, fund managers dodged restrictions that would have made it harder for them to continue paying the same low tax rates on their income.
Republicans and Democrats have advocated for the elimination of the tax break since it was brought to the attention of Congress in 2007 by a journal article by a law professor. So far, they have failed to close the loophole.
Trump-era politics added a caveat to the loophole through a three-year hold period, which means private equity funds must hold their portfolio companies for at least three years before withdrawing their cashout.
The Inflation Reduction Act provision would have extended that detention period to five years, meaning that even if she had survived talks with Sinema, she would not have completely closed the loophole.
According to a report 2021 by financial software company eFront, the average holding period for a private equity fund in 2020 was already 5.4 years.
Yet the deferred interest tax provision is a relatively small part of the Inflation Reduction Act. Lawmakers estimated the provision would generate about $14 billion over the next 10 years, compared to the $790 billion total they say would be produced as a result of the bill.
Senate Majority Leader Senator Chuck Schumer also reiterated Thursdayy that the bill still involves a tough new minimum on the taxes America’s biggest corporations must pay.
“The deal preserves key elements of the Cut Inflation Act, including cutting prescription drug costs, tackling climate change, closing tax loopholes operated by big business and the wealthy and $300 billion in deficit reduction,” Schumer said. The final version of the bill will be released on Saturday, he added.
President Joe Biden Thursday night welcomed the cooperation of Sinema as “another critical step toward reducing inflation and the cost of living for American families.”
Sinema’s opposition to the provision had opened up the possibility that she or Sen. Joe Manchin of Virginia – who agreed to a surprise deal on the bill last week – could overturn the Cut Inflation Act at because of that. The two lawmakers helped end President Joe Biden’s Build Back Better plan.
However, the pair disagree on carried interest, a tax loophole that allows wealthy investors and hedge fund managers to pay less tax. While closing the loophole has been a priority for Manchin, Sinema opposes eliminating the tax break.
Sinema’s announcement on Thursday confirmed that his concerns about the bill prevailed and the retainer would be reduced.
Manchin and Sinema did not immediately respond to Insider’s requests for comment.