Private Equity Council • June 20101
The Impact of H.R. 4213 on Private Equity Investment and Employment
H.. 4213, Te “American Jobs and losing tax Loopholes Ac 2010” wold increase he ax rae onlong-erm capial gains income received hrogh a carried ineres in a parnership rom he crren raeo 15% o 38.5% when lly-phased in. Tis represens a 157% ax increase, or more han a dobling o he governmen’s share o hese parnerships’ long-rn invesmen income. Sch a signifcan increase inhe eecive ax rae on long-erm invesmen cold have deleerios economic conseqences.Te mos immediae economic impac o he ax increase wold likely be el in he real esae secor,which conines o ser rom low prices and high deals. Te deal rae or commercial propery morgages held by u.S. banks more han dobled in he orh qarer o 2009 and is expeced o in-crease hrogho 2010. ne in wo parnerships in America are in real esae and hese 1.48 million realesae parnerships hold more han $4.2 rillion in asses.
By comparison, he oal vale o all real esaeowned by nonfnancial corporae bsinesses in America is $6.3 rillion.
Increasing axes on real esaeparnerships redces aer-ax rerns, which cold redce he prices hese invesors are willing o bidon properies. Te likely eec is o redce prices rher, which wold increase deal raes.
Tis coldplace addiional pressre on regional banks, as insred deposiory insiions wih $100 million o $1billion in asses hold 25% o commercial propery loans osanding and 15% o all aparmen loans.
While he impac on real esae is likely o be more immediae given crren marke condiions, anohersignifcan long-rn economic eec will come rom he redcion in corporae fnance-oriened privaeeqiy invesmen. Venre capial, growh capial and byo nds channel capial o oherwise capial-consrained sar-ps, small-and-medim sized bsinesses, and larger companies in need o resrcringor new sraegic direcion. While i is exceedingly dicl o isolae he marginal impac on parnershipinvesmen behavior o an increase in an eecive ax rae precisely, invesmen and ax daa rom 1980 o2009 sgges ha:• A one percenage poin increase in he eecive ax rae is associaed wih a $1.8 billion decrease inannal privae eqiy invesmen, holding oher acors consan. Tis fnding is saisically signifcana he 94% confdence inerval.• A one percenage poin increase in he eecive ax rae is associaed wih a 1.07% decrease in annalprivae eqiy invesmen, holding oher acors consan. Based on 2009 invesmen levels, hiswold ranslae o a $525 million redcion in invesmen or every one percenage poin increasein he ax rae.• H.. 4213, Te “American Jobs and losing tax Loopholes Ac 2010” wold increase he eecive
1 Inernal evene Service, Saisics o Income ivision, Fall SI Bllein, Ags 2009.2 Federal eserve Board o Governors, Z1: Flow o Fnds Accons o he unied Saes, B.102.3 Te mos signifcan variable or predicing commercial morgage deal is he vale o he nderlying propery in relaiono he ace vale o he morgage. See Li, Jabbor, and Green (2007).4 Bloomberg, “ommercial Morgage eal ae in u.S. More han obles,” Febrary 24, 2010.