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Hedge Funds Win in Senate Dems' Jobs Bill Deal

June 7, 2010 - by Donny Shaw

Senate Democrats are facing pushback from both sides on the jobs bill they are trying to pass this week. On one side, liberals, the unemployed and state governors from around the country are pushing them to restore funds that were dropped by the House for helping unemployed people keep their health insurance under the COBRA program and for cash-strapped states to pay for Medicaid services. On the other side, a mix of business interest and right-wing activists are fighting against the revenue-raiser provisions in the bill that would close tax-code loopholes and increase taxes on a few industries.

Congress Daily is reporting late Monday night that the Dems are close to reaching an agreement on what to do with the bill in order to round up the final votes:

Senate Democratic negotiators are close to an agreement to ease the bite of a proposed tax increase on investment fund managers, according to congressional aides. The House-passed “extender” bill would have taxed fund manager profits at a blend of 75 percent ordinary income rates and 25 percent capital gains after an initial two-year transition period. An emerging Senate compromise being worked out by Finance Chairman Max Baucus, Sen. Robert Menendez, D-N.J., and other panel members would lower the portion subject to ordinary income rates to 65 percent, but with a twist: The rate on the sale of investments held longer than seven years would see a reduction to 55 percent ordinary income in the emerging compromise. Aides cautioned that the proposal was not yet final, but one aide remarked that a deal is “coming together.”

In other words, the plan is to soften a provision in the bill that would partially close a loophole in the tax code that lets hedge-fund and private-equity managers pay the lower capital gains rate (15%) on the cut they take from the appreciation of their clients’ portfolios rather than the regular income tax rate (up to 39%).

Janet Hook at the L.A. Times reported yesterday that the thing keeping some Democrats from backing the jobs bill is that its spending provisions are not fully offset with new revenue provisions, and that the ever-growing federal deficit is shaping up to be the big issue in the November mid-terms. Despite that, the Dems are not proposing to change the bill in a way that will soften its impact on the deficit. They are making it more costly. The Congressional Budget Office hasn’t given a budget scoring to this new compromise, but we know that restoring the COBRA health care benefits would cost $7 billion, and my best guess would put the cost of weakening the hedge-fund tax provisions according to the above plan at about the same cost.

So, why are the Democrats choosing this over restoring COBRA funds in the bill for helping hundreds of thousands of unemployed people get health insurance? Here’s a guess: the hedge fund industry has given Senate Democrats more than $14 million in campaign contributions during the last two cycles. The unemployed? Well, despite dwarfing hedge fund managers in sheer numbers, they don’t have jobs, meaning that they have no extra money to donate to senators’ campaigns.

UPDATE: Politico is reporting that the money for helping states pay for Medicaid may be added back into the bill as well. Full details of the compromise are expected to be made public later today, so we’ll know soon exactly what the Senate will be voting on this week.

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