Sinema Joins Democrats in Support of Inflation Reduction Act With Removal of Carried-Interest Tax Provision

Arizona Democratic Sen. Krysten Sinema revealed that she would soon be ready to "move forward" with the revised version of Senate Democrats' healthcare, climate, and deficit-reduction package with some changes to tax policies.

The decision opens the door for party lawmakers to adopt the long-stalled bill as early as this weekend. Sinema also offered her must-have support after Democratic leaders agreed to pare back some of their original tax proposals, capping days of speculation about her public silence.

Kyrsten Sinema and Democrats

It also moves the party one step closer to fulfilling a central element of United States President Joe Biden's economic agenda. The Arizona lawmaker said in a statement that Democrats had "agreed to move" a key tax policy that targeted wealthy investors and aims to address what is known as the "carried-interest loophole."

Furthermore, Sinema signaled that they had made additional changes to a second provision that imposes a new minimum tax on corporations that currently pay nothing to the U.S. government. The latter set of revisions is likely to benefit some manufacturers in the country, as per the Washington Post.

Many corporate executives, including Arizona business leaders, had previously petitioned Sinema to consider the consequences of the tax in recent days. With the agreement, Democrats opted to seek a new 1% tax on corporate stock buybacks.

The move aims to make up at least some of the revenue that might have been lost as a result of the changes, said two sources familiar with the matter. Party lawmakers also agreed to set aside new money at the request of the Arizona senator to respond to climate change issues, including drought.

According to Business Insider, Democrats and Republicans have advocated eliminating the tax break since it was brought to the attention of Congress in 2007 by a law professor's journal article. So far, lawmakers have failed to close the loophole.

Inflation Reduction Act

Furthermore, a Trump-era policy added a caveat to the loophole through a three-year holding period. This means that private-equity funds have to hold on to their portfolio companies for at least three years before cashing out.

The Inflation Reduction Act's provision would have extended that holding period to five years, which means if it survived discussions with the Arizona lawmaker, it would not have closed the loophole completely.

But a 2021 report by eFront, a financial-software company, found that the average length of a private-equity fund's holding period in 2020 was already 5.4 years. The carried-interest tax provision was a relatively small part of the Inflation Reduction Act.

Lawmakers have estimated that the provision would generate roughly $14 billion over the next decade, compared to only $790 million that they said would be produced as a result of the bill. On Thursday, Senate Majority Leader Sen. Chuck Schumer also reiterated that the bill would still introduce a new hard minimum on the taxes that America's largest corporations pay.

A remaining hurdle for Democrats is now a review by Senate parliamentarian Elizabeth MacDonough, who must decide whether or not the provisions in the bill meet strict rules to allow Democrats to use the filibuster-proof budget process to pass the legislation along straight party lines, CNN reported.