Manchin and Sinema are on a collision course that could reverse the Biden deal

  • Manchin and Sinema are about to clash over a tax loophole affecting wealthy investors.
  • Manchin wants to close the accrued interest, but Sinema is able to remove the change from the bill.
  • Democrats may wait days, if not weeks, before Sinema breaks her silence.

Senate Democrats are relearning an old Argentine dance lesson: It takes two to tango.

Senator Joe Manchin of West Virginia surprised many by agreeing to a $790 billion tax, health and climate package. The legislation is much larger than most Democrats thought possible just two weeks ago, when Manchin appeared to take climate programs and tax increases off the table, citing growing fears about rising inflation.

But the most carefully negotiated deals can still be disrupted in an environment where there is no room for error. Manchin is on a collision course with Sen. Kyrsten Sinema of Arizona over a small piece of the bill. The pair disagree on accrued interest, a loophole in the tax code that primarily benefits wealthy investors and hedge fund managers.

Eliminating accrued interest is a goal that has eluded Republican and Democratic administrations for a decade. It is the percentage of earnings that hedge fund managers receive from profitable investments. But that compensation is taxed at a lower capital gains rate that tops out at 23.8% and doesn’t face a higher income tax rate like the one most Americans pay on their wages. Critics argue that it amounts to a huge loophole in the tax code.

Sinema was left out of the private negotiations between Manchin and Senate Majority Leader Chuck Schumer. She reportedly prompted her to ask her fellow senators “What’s going on?” when the news of the agreement was known in the plenary session of the Senate.

“It’s the latest baffling move by Senate leaders and it doesn’t seem like a strategy designed to maximize the chances of success,” John LaBombard, a former Sinema aide, told Insider. He said the Arizona Democrat has long had a “particular interest” in the tax proposals in the mix. “It strikes me as a very strange strategy to let the rest of the caucus find out about the agreement through a press release.”

For his part, Manchin has expressed strong support for the measure and does not seem inclined to abandon it. Last year, he joined two Senate Democrats in sponsoring a bill that eliminates accrued interest. “The only thing I stood my ground on was accrued interest,” he told reporters on Thursday.

Sinema is known to harbor objections to reducing the shared interest, according to a familiar Democratic aide. But Democrats hope it won’t be scrapped, as it represents the only tax increase for wealthy people in the bill. Sen. Elizabeth Warren of Massachusetts said Democrats are doing “exactly the right thing” to include him.

Others warn that the party will have a bumpy ride. But the finish line is in sight after a year of tense negotiations that still rest on Manchin and Sinema. “Until you finish it, there are twists and turns,” Sen. Tim Kaine of Virginia told Insider. “Senator Sinema is going to do her own due diligence, which she does.”

Sinema’s office said in a statement that it is still reviewing the 725-page legislation and awaiting rulings from the Senate MP, which governs what it qualifies under reconciliation, the legislative maneuver Democrats are using to avoid Republican filibuster and pass the bill along party lines in the Senate split evenly. Democrats may wait days, if not weeks, before Sinema breaks her silence on the package.

Schumer declined to comment Thursday on whether he had kept Sinema informed. “Members are reviewing the text and we will all talk shortly,” he told a news conference. His goal is to put the bill on the floor sometime in the next week.

A tax loophole that both Democrats and Republicans can’t seem to close

From left to right, Sen.-elect Kyrsten Sinema, Senate Minority Leader Chuck Schumer, DN.Y., and Sen.-elect Jacky Rosen, D-Nevada, speak during a photo op in Schumer's office on Capitol Hill .  on Tuesday, November 13, 2018.

From left to right: Sen. Kyrsten Sinema (D-Ariz.), Senate Majority Leader Chuck Schumer (DN.Y.).

Bill Clark/CQ roll call

Both Presidents Donald Trump and Barack Obama tried to eliminate carried interest, but to no avail. What is now on the table does not remove it either; the changes Democrats are seeking only make it harder for wealthy investors to get the prime tax rate on tiers of their income.

“This doesn’t completely close the loophole,” Kimberly Clausing, a former Treasury Department tax official for the Biden administration, told Insider. “It only does this partially by lengthening the amount of time you have to hold the investment for it to qualify as a capital gain.”

Closing the accrued interest loophole would only affect part of the financial sector. But it is a tax that hits a powerful group of wealthy Americans who have so far managed to escape tax increases under the Biden administration.

The American Investment Council, a lobbying group that represents private equity firms like Blackstone, immediately attacked the interest-bearing initiative as a burden on small businesses that profit from its investments.

“This is like a small universe of a few hedge funds that maybe have long-term investments, a lot of private equity or venture capital firms,” ​​Ben Koltun, director of research at Beacon Policy Advisors, said in an interview. “They are a very select few people, but also a very powerful few people.”

It is possible to renew the proposal to secure Sinema’s support without losing Manchin’s approval.

“There are ways to adjust it,” David Kamin, a former deputy director of the White House National Economic Council under Biden, told Insider. “But this is one that already represents a compromise even as it raises $14 billion by changing the treatment of a small group of people who can turn their earned income into capital gains.”

“If this just fell through, the amount of money wouldn’t sink these other really important things that the bill is doing,” Clausing said.

However, Sinema has exerted enormous influence over the process. That is not likely to change.

“I certainly hope that at this point it is very clear to Sen. Schumer and other party leaders that political pressure doesn’t work on Sen. Sinema,” said LaBombard, now a senior vice president at public affairs firm ROKK Solutions. “After a year of repeatedly trying and failing to pressure her into taking positions contrary to her long-held views, this should surprise no one.”

Investors and money managers hoping to remove accrued interest from the bill may have an ally in Sinema. Individuals and organizations in the securities and investment industry have donated $2.2 million to the Arizona Democrat since 2017, according to data from nonpartisan campaign finance tracker OpenSecrets.

“You know, one will say, ‘I’m opposed to this,’ and the other will say, ‘I’m opposed to that,’ and we can’t have this or that,'” Steve Rosenthal, a senior fellow at the Tax Policy Center, told Insider. “It’s almost like a stage performance right now.”

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