Just Taxes Blog by ITEP

Kyrsten Sinema’s Latest Fight to Protect Tax Breaks for Private Equity

September 15, 2023

On September 14, business-funded outfits like the Tax Foundation, the National Association of Manufacturers and others hosted a briefing where Sen. Kyrsten Sinema and Sen. Shelley Moore Capito talked up their legislation to stop a seemingly arcane business tax increase that was enacted as part of the 2017 Trump tax law to partly offset that law’s corporate tax cuts.

Rumor has it that – unsurprisingly – no one at this event focused on the fact that they are trying to undo part of the very tax law that these business groups had supported back in 2017 – and that doing so would simply increase the size of the Trump tax cuts for big businesses.

The provision in question limited the deductions that large companies can claim for interest payments to 30 percent of their adjusted taxable income. Before 2022, the law defines adjusted taxable income as taxable income before interest, taxes, depreciation, and amortization are subtracted.

From 2022 on, it defines adjusted taxable income as a smaller number, which is taxable income before interest and taxes are subtracted (after depreciation and amortization are subtracted). This tighter version of the limit is what the Sinema-Capito legislation would repeal (retroactively, given that it went into effect in 2022).

ITEP has previously explained how preserving the looser limit on deductions for interest payments would be enormously helpful to private equity firms because their business model is to acquire companies and load them up with debt to finance the transaction so that their investors do not have to put up much money themselves. When the model works, the acquired companies can pay off the debt – with the help of generous tax deductions for interest payments.

But this model often ends in disaster, including the collapse of some major corporations like Toys “R” Us and Payless. Leaving the more generous limits in place, as Sinema and Capito propose, would continue a tax subsidy for the private equity industry’s practice of driving companies into unstainable debt that often seals their doom and destroys thousands of jobs.

Why would lawmakers want to do this? The motivations they offer in public do not withstand scrutiny.

For example, the press release for the bill from Sen. Sinema is titled “Sinema Introduces Bill Cutting Costs for Arizona Small Businesses” and refers to the bill as helping “small businesses” eight times in the text.

This is entirely false. The provision of the 2017 law that her bill would modify, the limit on deductions for interest payments, applies only to businesses with gross revenue of more than $29 million and exempts certain kinds of businesses like farms.

This is not the first time that Sinema has fought hard to keep taxes low for the private equity industry. During the summer of 2022, when she featured prominently in the debate leading the enactment of the Inflation Reduction Act, she came to the rescue of private equity twice.

First, she prevented Democrats from including a provision that would limit the “carried interest loophole” that allows private equity fund managers to claim the lower tax rate for capital gains income, even though their income is obviously compensation for managing the money of others, not capital gains.

Second, she forced Democrats to accept an amendment that carved an exception into the law’s corporate minimum tax for companies held by private equity. When asked by reporters why the new law should treat these companies differently than others, a “Sinema spokeswoman said several Arizona small businesses, including a plant nursery, had raised concerns.”

It would not occur to most of us how the IRA’s minimum tax, which applies only to corporations with profits exceeding $1 billion, could affect a “small business” that is a plant nursery, or what any of this has to do with private equity.

In fact, the only plant nursery in Arizona that seems to have anything to do with private equity is Moon Valley Nurseries, a sprawling company with “18 farms and 34 locations in California, Arizona, Texas and Nevada.” In October 2021, a New York-based private equity firm sank $775 million into Moon Valley Nurseries. Despite this $775 million investment, this is, to our knowledge, the only “small business” plant nursery that is benefiting from Sinema’s fight for lower taxes for private equity.

Of course, what’s at stake is much greater than a plant nursery (even one worth $775 million). The Sinema-Capito proposal to weaken one of the few cost-containing provisions of the 2017 tax law is part of a larger effort to undo nearly all of them, including a gradual phasing out of bonus depreciation and a less generous tax break for loosely defined “research” that companies do.

A legislative package moved out of the House Ways and Means Committee by Republicans in June would expand the Trump tax cuts for big businesses by targeting all three provisions (the limit on interest deductions, the phasing out of bonus depreciation, and the less generous break for research). ITEP found that the package would provide the most generous tax cuts next year to the richest one percent of Americans ($28 billion) and foreign investors who own stock in American corporations ($24 billion). The stakes are very high indeed.


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