Last week, Democrats in the Senate and House managed to pass the Inflation Reduction Act—a significant tax, climate, and health care package—but only after appeasing one senator from Arizona by allowing an ongoing tax loophole for investment executives.
For years, lawmakers have attempted to close the carried interest loophole, an income tax arrangement that favors investment managers at private equity, hedge fund, and venture capital firms by allowing them to pay lower taxes—at a rate based on capital gains as opposed to their actual income from labor.
Once Senate Majority Leader Chuck Schumer (D-N.Y.) worked out a deal with Sen. Joe Manchin (D-W.Va.)—who has repeatedly obstructed Biden’s agenda—it briefly looked like Democrats might succeed in ending the special tax treatment.
But with the need for all 50 Democratic senators to sign on in order for the bill to pass, Sen. Kyrsten Sinema (D-Ariz.) wasn’t about to concede her power. Although the state she represents isn’t home to many private equity firms, she has become the Senate’s leading defender of the industry. This staunch support has puzzled some observers, including The New York Times, which acknowledges the campaign contribution connection but questions why the senator doesn’t explicitly explain her support of the carried interest loophole.
A Center for Media and Democracy (CMD) review of federal campaign finance records shows that since the 2018 election cycle, many executives and lobbyists from the nation’s top private equity firms have showered Sinema’s campaign with cash, while also funding industry PACs that donated to her campaign. Many industry donors hail from California, Massachusetts, New York, and Texas, but few, if any, live in Arizona.
Corporate PACs have helped out, too, but these can only give a maximum of $5,000 per election. Together, the many managers who run these firms can give far more—up to $2,900 per election, or $5,800 for the primary and general elections in a given cycle.
With access guaranteed by their contributions, many members of the investment management industry had “numerous in-person meetings” with Sinema and her staff in the weeks leading up to the vote, according to CNBC.
From C-Suite to Sinema
Since running for Senate in 2018, Sinema has raked in nearly $2.5 million from individuals and PACs in the securities and investment industry, according to Federal Election Commission (FEC) data analyzed by the Center for Responsive Politics. And 86% of that support came from individual executives in the industry.
A member of the Senate Banking Committee and its securities, insurance, and investment subcommittee, Sinema has courted private equity titans and received the maximum allowed amount from the PACs of leading private equity firms such as The Carlyle Group, along with the industry’s trade organization, the American Investment Council (AIC). Even though she is not up for reelection until 2024, her campaign has already taken in $63,000 from securities and investment PACs since last year.
Still, the bulk of Sinema’s industry funds comes from executives—the very people who would have been forced to give up their lucrative loophole and pay taxes at a higher rate if she hadn’t blocked the carried interest reform proposal. Among her donors in the 2021–22 election cycle are the following executives from some of the world’s largest private equity firms:
- Henry R. Kravis, the billionaire cofounder and co-executive chairman of the world’s largest private equity firm ($5,800, the maximum amount of $2,900 for both the primary and general elections). An avid Trump supporter and Republican megadonor, he gave $1 million to the ex-president’s inauguration fund.
- George R. Roberts, Kravis’ cousin and the billionaire cofounder and co-executive chairman of KKR ($5,800 to Sinema’s campaign and another $5,000 to her leadership PAC, Getting Stuff Done)
- Joseph Bae, co-CEO of KKR ($5,800)
- Robert Lewin, a partner and CFO of KKR who appears to have made his first and only federal campaign donations to Sinema last year ($5,800)
- Ken Mehlman, a partner and global head of public affairs at KKR and a former member of the George W. Bush administration ($5,800)
The Carlyle Group
- Peter J. Clare, a director and chief investment officer of corporate private equity at The Carlyle Group, the sixth-largest private equity firm in the world ($5,800 to the Sinema campaign and $4,200 to her leadership PAC)
- Brian Bernasek, a managing director at Carlyle ($5,000)
- Sandra Horbach, a partner and co-head of U.S. buyout and growth at Carlyle ($5,800 to the Sinema campaign and $4,200 to her leadership PAC)
- Jon Gray, president and COO of Blackstone, the second-largest private equity firm in the U.S. ($10,000 to Sinema’s leadership PAC)
- Sean Klimczak, a senior managing director and the global head of infrastructure at Blackstone, as well as a board member of the natural gas giant Cheniere Energy who led Blackstone’s investment in the company ($5,800)
- Eli Nagler, a senior managing director of private equity at Blackstone ($2,800)
- Alex Katz, managing director of government relations at Blackstone, a former senior aide to Senate Majority Leader Schumer, and a member of the 2019–20 Biden for President National Finance Committee ($1,000 to the campaign and $500 to the leadership PAC)
- Giovanni Cutaia, global head of real estate asset management at Blackstone ($2,900)
CVC, General Atlantic, Bain, and More
- Christopher Stadler, a managing partner at CVC Capital Partners, the world’s fourth-largest private equity firm, who leads the company’s private equity investments in North America ($5,800)
- Bill Ford, CEO of General Atlantic, the seventh-largest private equity firm in the world ($5,800)
- Heather Berger, a senior partner at Apollo Global Management ($5,800)
- Josh Bekenstein, co-chair of Bain Capital ($2,800)
- John Connaughton, global head of Bain Capital Private Equity, co-managing partner of Bain Capital, and a GOP megadonor ($5,800)
- David Belluck, a general partner of Riverside Partners ($5,800); three of his relatives who live at the same address each gave $5,800 as well
Many of these same executives, including Bae, Kravis, and Mehlman, have also funded the AIC PAC this cycle. In addition, Sinema has received large donations from several other Republican billionaires.
Sinema is not the only U.S. senator to reap rewards from private equity firms; Schumer, for example, has received even more from the securities and investment industry since 2017. But he represents New York City, where many firms are headquartered, and as the senate majority leader, holds a position of influence that naturally attracts significant campaign contributions.
Private Equity Lobbyists Join In
Lobbyists representing the top private equity firms have also given large amounts to Sinema's campaign.
Subject Matter partner and cofounder Steve Elmendorf, who lobbied Congress directly on carried interest for both Blackstone and the AIC, gave Sinema $2,900, including $1,000 last August just as Democrats were attempting to negotiate passage of the since-failed Build Back Better package. As if in direct response, Sinema opposed closing the carried interest loophole in that proposed legislation, too. Elmendorf’s colleague Barry LaSala, who also lobbied on the same issue, donated $1,000 to Sinema in April.
Langston Emerson of Cypress Advocacy, who lobbied Congress on carried interest on behalf of the AIC, gave the Sinema campaign $4,500 in 2021.
In addition to in-person lobbying, Sinema was faced with public pressure from her allies. Last year the U.S. Chamber of Commerce gave the senator an award after she blocked a $15 minimum wage provision in the American Rescue Plan. This year the Arizona Chamber bought ads in local newspapers slamming the Inflation Reduction Act as a job and infrastructure killer and urging readers to call their senators to tell them to oppose the bill. The year before, the AIC ran its own ads and op-eds targeting Sinema and other senators.
Multiple Handouts to Private Equity
The failed carried interest provision would have effectively prevented investment managers from treating their own compensation as investment income, forcing them to pay a 37% marginal tax on their actual income as opposed to the much lower 20% long-term capital gains tax the loophole allows.
The 2017 Republican tax cut bill required finance executives to hold an investment for at least three years—as opposed to the previous one-year requirement—before realizing the gains at the lower tax rate. Democrats had wanted to extend the holding period to five years this time around, knowing that most firms would not hold an investment for that long before cashing out.
The private equity lobby—and Sinema—have consistently cast the tax loophole as essential for promoting local investments. Since private equity firms invest heavily in small businesses, the argument goes, imposing higher income taxes on managers would disincentivize them from making future investments. The AIC made this claim on Twitter, but it’s a fallacy: a tax on a manager's earnings from the firm's investments is not a tax on “the private capital that is helping local employers survive and grow.” It is simply an income tax on hedge-fund managers and other wealthy finance executives, meaning that it’s about their own money and personal bottom line, not the funds available to the firm for investments.
The economy just shrank for the 2nd quarter in a row – Washington should not move forward with a new tax on private capital that supports small businesses, jobs, and pensions across America. pic.twitter.com/Tprwo0LqAV
— American Investment Council (@AmericaInvests) July 28, 2022
In the final stages of negotiating passage of the Inflation Reduction Act, Sinema and six other Democrats joined Republicans to give the private equity industry yet another gift—one with an estimated value of $35 billion. The amendment they passed creates a special carveout that allows large private equity firms "to avoid tallying the earnings of their subsidiaries and portfolio companies when calculating whether or not they are subject to the new 15 percent corporate minimum tax," according to The Lever.