Congress is looking at the boom in private equity--including Blackstone Group--as a new source of tax revenue, CNBC's Hampton Pearson reported.
The move to end a tax break for private equity is gaining steam on Capitol Hill, with some members hoping to use the potential billions in added revenue to make changes in the Alternative Minimum Tax, which increasingly is hitting the middle class.
A bill was introduced in the Senate last week that would require publicly traded partnerships deriving income from investment advice and asset management to pay the federal corporate tax rate of up to 35% instead of the current 15%. The measure was submitted by leaders of the Senate Finance Committee, Chairman Max Baucus, a Montana Democrat, and senior Republican Chuck Grassley, of Iowa.
The bill stunned the financial community, coming shortly before Thursday's pricing of Blackstone's initial public offering, which is expected to raise about $4 billion. Blackstone is one of the nation's largest private equity firms.
While Blackstone would get a five-year exemption (since it filed to go public before the bill was introduced), the potential for a tax hike so far hasn't discouraged others from following suit. According to CNBC's Charlie Gasparino, Kohlberg Kravis Roberts has hired Morgan Stanley and Citigroup for a possible IPO later this year.
Impact on Markets
Some in Congress, however, are concerned about the bill’s impact on capital formation.
On Wednesday, the leaders of the Senate Banking Committee asked the Treasury Department and the Securities and Exchange Commission for analysis of the proposed legislation.
Sens. Christopher Dodd and Richard Shelby, the Democratic chairman and senior Republican on the panel, respectively, asked about the bill's "likely impact on the nation's capital markets, including the potential effects on investor protection, capital formation and other relevant issues."
In an exclusive interview on CNBC Thursday, Shelby said he opposed efforts to increase taxes on Blackstone Group.
Companies like Blackstone are the “enemies of inefficiency and waste” and “have saved a lot of companies that weren’t well-managed,” he said.
“We have a great economy, but if we tax it to death, we will be in trouble,” Shelby added. “The Democrats always, it seems to me, are looking, to raise taxes rather than to promote efficiency in the economy and give people tax breaks. I believe we ought to look at the tax code, not for money, but to promote the economy.”
Rep. Henry Waxman, D-Calif., asked the SEC to delay the Blackstone IPO pending Congressional hearings after the July 4 recess. But SEC Spokesman John Nester said, "Congress has created the world’s strongest investor protection laws, which the Commission has rigorously applied." Nester also noted that the effectiveness of a registration statement may be refused only if the statement contains "material misstatements or omissions."
The China Factor
Another souce of concern on Capitol Hill is that China plans to invest $3 billion in Blackstone, though not through the IPO.
“The future implications of China’s partnership with Blackstone deserve much greater scrutiny than they’ve had so far,” Alan Tonelson, research fellow at the U.S. Business and Industry Council, told CNBC. “You have to remember that Blackstone’s Chinese partner is not a Chinese private company, which is a controversial concept to start with, it’s the Chinese government. The Bush administration’s defense department has once again reminded us that China is a major and growing national security problem for the United States.”
But others said current concerns are a replay of old arguments.
“This is a tempest in a teacup,” said Nariman Behravesh, Chief Economist at Global Insight. “Twenty years ago, we worried about the same thing with the Japanese. It didn’t happen. There are all sorts of controls on what investors get to see. Why would the Chinese get to see it?”