Wall Street barons did not buy Sen. Kyrsten Sinema's vote. Let's set the record straight

Much of the media would have us believe that Sen. Kyrsten Sinema was bought off by the private equity (PE) industry and other Wall Street barons in the recent negotiations over the Inflation Reduction Act.

Some portray the events as a quid pro quo in which money was funneled to her contemporaneous with negotiations, thereby securing her roadblock of the legislation until Democratic leadership capitulated to her demands.

This characterization is not only revisionist history but also promotes a dangerous narrative.

Let’s set the record straight.

Sinema spelled out her opposition long ago

One recent AP article attempted to create a direct link between Sen. Sinema’s receipt of political donations and her decision to oppose increases to certain corporate and individual taxes previously contained in the Act.

To wit: “The donations [from the private equity industry], which make Sinema one of the industry’s top beneficiaries in Congress, serve a reminder of the way that high-power lobbying campaigns can have dramatic implications for the way legislation is crafted … .”

It is a false inference.

Their influence: How Sinema, Kelly shaped the Inflation Reduction Act

The reality is, Sen. Sinema’s objection to tax increases has been well-known since at least early last summer when her opposition to tax increases contained in the Build Back Better plan came to light.

The more reasonable conclusion is that the private equity industry wished to support a centrist Democrat who had already made her views on the subject clear. Their donations were not made amid negotiations but well in advance and in support of her stated position.

Proposal would have taxed the small guys, too

On other topics, detractors of Sen. Sinema and the PE industry appear to be simply misinformed. Specifically, they seem to misunderstand the actual structure of the proposed tax provision changes and their resultant implications.

The two primary tax provisions struck from the Inflation Reduction Act in response to the senator’s objection related to:

• subjecting bundled PE portfolio companies (regardless of size) to the same 15% minimum corporate tax that was intended to be reserved only for the largest companies in America; and

• a proposed increase in the tax rate applied to “carried interest” (i.e., the profit share received by private equity fund managers).

The defeat of both is easy to defend when one understands not only the value that the PE industry provides but also that the vast majority of private equity and real estate partnership participants in America are quite small and are as likely to hail from Manhattan, Kan., as the Big Apple.

The Democrats’ last-minute proposal required a PE fund to combine the “book income” (i.e., the income a company shares with its shareholders) of all of its various portfolio companies.

If that combined total exceeded $1 billion, every one of those portfolio companies, small or large, would be required to pay an untenable minimum tax that was intended only for some of the country’s largest global enterprises.

Sinema stopped an unintended consequence

These types of unintended consequences are unsurprising in the throes of last-minute negotiation and money grabs. Sen. Sinema was a check against such excess.

On the second provision, opponents of the current carried interest tax treatment describe it pejoratively as a “loophole” to be “fixed.” When, in fact, it is an enduring recognition of the risks taken to aid the entrepreneurial engine that has forged American prosperity for decades and created the likes of Microsoft, Apple, Facebook, Alphabet (Google), Uber, Amazon, Genentech and countless others.

These opponents of the current tax treatment attempted to characterize the proposed “fix” not as a direct tax increase but, rather, an increase in the holding period of an investment from three to five years. But this is further obfuscation.

Under the proposal, the holding period would not have begun until all the fund’s investments have been “substantially” achieved. Importantly, a typical fund has a five-year investment period before it even begins selling investments.

Thus, the practical holding period before any sale can occur in order to achieve the lower capital gains tax treatment is closer to 10 years – a highly impractical result.

This was about her conviction, not greed

Sen. Sinema understands that private equity is an unmatched engine of economic development and job creation. Those who create the private funds forego steady and dependable incomes in exchange for the opportunity to receive a piece of the profit, but only if the investments they manage prove successful and generate a profit – no easy task.

Increasing the federal tax rate on carried interest would result in a significant downsizing of the private equity industry.

The modified incentives for the fund manager would now be to avoid risky or distressed investments (such as potential medical, scientific or technological breakthroughs) or perhaps simply forgo creating a fund at all. This leaves a private equity industry incapable of making big bets that underpin the advancements for which America is known.

Sen. Sinema was not trolling her vote in hopes of finding the highest bidder. Her objection to tax increases was well-established prior to receipt of the donations in question. More importantly, her impact on the carried interest and minimum corporate tax provisions was the result of her conviction and not greed or graft.

When those tasked with informing the public cut corners or take a haphazard approach to their duty, we all suffer. We can do better.

Dan Mahoney is a partner at Snell & Wilmer LLP. He is a third-generation Arizonan, a registered Republican and routinely advises clients on matters related to corporate and private equity matters. Reach him at dmahoney@swlaw.com.

This article originally appeared on Arizona Republic: Sen. Kyrsten Sinema's vote on Inflation Reduction Act was not bought