• Rich investors can thank Sinema for some wins in the Democratic climate and tax bill.
  • She intervened twice over the span of a week in ways that benefited private equity.
  • Sinema secured changes to the corporate minimum tax that sets up a loophole.

Rich investors and hedge-fund managers scored some major victories in the Democratic climate, health, and tax bill that passed the Senate on Sunday. The $4 trillion private equity industry can thank Sen. Kyrsten Sinema of Arizona.

In the legislation known as the Inflation Reduction Act, Sinema intervened twice over the span of a week in ways that mostly benefited rich investors:

  • Added a carveout exempting private equity's subsidiaries from the 15% corporate minimum tax (which would have raised $35 billion over a decade)
  • Removed a provision narrowing the carried interest loophole (which would have raised $14 billion over a decade)

"They avoided an added tax or added hurdles," Ben Koltun, research director at Beacon Policy Advisors, told Insider. "It's kind of standard operating procedure as usual for the private equity industry. They won by not losing."

The private equity exemption from the corporate minimum tax means any profits generated from smaller companies owned by that sector won't count towards the $1 billion threshold established for large, profitable firms to be taxed. Some experts are beginning to describe it as a new loophole that will be set up in the tax code.

"Even if a company has subsidiaries that do finance-related things, that's still part of the ownership structure," Kimberly Clausing, a tax professor at the UCLA School of Law, told Insider. "And it still contributes to the bottom line for the company as a whole. So it seems like it should also be subject to the minimum tax."

Lawrence Summers, a former Democratic treasury secretary, simply called it a "loophole."

"There is no legitimate public policy argument for the maintenance of carried interest or @SenJohnThune /@SenatorSinema's private equity carve out from the bill," Summers wrote on Twitter, referring to the Senate Republican who authored the changes alongside Sinema.

A spokesperson for Sinema argued that the changes to the original tax plans would support Arizona businesses like plant nurseries and auto detailing shops.

"Senator Sinema makes every decision based on one criteria: what's best for Arizona. She has been clear and consistent for over a year that she will only support tax reforms and revenue options that support Arizona's economic growth and competitiveness," the Sinema spokesperson said.

"At a time of record inflation, rising interest rates, and slowing economic growth, disincentivizing investments in Arizona businesses would hurt Arizona's economy and ability to create jobs," she added.

The carveout appears to stem from a pressure campaign on Sinema that business groups and Republicans mounted over the weekend. They claimed that the 15% corporate minimum tax included a new provision that would hit smaller businesses already struggling with surging expenses from inflation.

A document obtained by Insider likely from private equity lobbyists attacked the provision as a "stealth tax" hitting 18,000 firms employing over 12 million people. It also assailed the measure as putting smaller companies owned by private equity at "a competitive disadvantage."

But that wasn't the case, per experts. "You can't say that this increases taxes on the portfolio companies," Victor Fleischer, a tax and private equity law professor at the UCI School of Law, recently wrote on Twitter. "The incidence falls on the shareholders (and a bit on the wealthy employees) of the sponsor."

The campaign seemed to have an effect on Sinema. She pledged her vote for a GOP amendment from Sen. John Thune of South Dakota that would alter the Democratic bill, Senate Majority Leader Chuck Schumer said on Sunday. He called it "a real bump in the road" that threatened the bill's path to passage.

During the flurry of last-minute negotiations between Sen. Joe Manchin of West Virginia, Thune, and Sinema, Democratic negotiators communicated to Sinema that she was introducing a big loophole in the tax code, per a Democrat familiar. She pursued it anyway.

Read the original article on Business Insider