WASHINGTON -- A tax dodge that millionaire hedge fund managers use to slash their income taxes could soon become a major election issue, as congressional Democrats and the White House gear up for a fight to close the loophole.
What makes it a real hot-button issue is that presumptive Republican presidential nominee Mitt Romney is this particular loophole's poster child.
Under current tax law, certain kinds of financiers, including private equity investors and some managers of hedge funds, are allowed to treat bonuses like long-term investment income, called carried interest, taxable at the maximum 15 percent capital gains rate. Others have to pay up to 35 percent taxes on their labor income. The cost to the U.S. Treasury is more than $1 billion a year.
One of the main reasons Romney paid 13.9 percent in taxes on his $21.7 million income in 2010 is that a big chunk of that income came from performance bonuses still trickling in from private-equity investments he managed during his career at his former firm, Bain Capital.
Each of President Barack Obama's proposed budgets has called for eliminating this sweetheart deal, but no measure has managed to make it past Republican-led Senate filibusters. The legislation was reintroduced in January by House Ways and Means Committee ranking Democrat Sander Levin and his brother, Sen. Carl Levin, both of Michigan.
Republicans control the House, and the Democrats' edge in the Senate is smaller than when the attempts failed. But the White House and Democratic congressional candidates think it's worth another shot.
A Democratic Capitol Hill aide who was not cleared to discuss legislative strategy told HuffPost the new legislation was developed in talks with the White House, and acknowledged that it would provide an opportune contrast with Romney.
White House chief economic adviser Gene Sperling told The Huffington Post that closing the loophole is "a no-brainer."
The White House pushes the repeal almost every time there's a budget discussion, he said, and it remains one of the items in the forefront of lawmakers' minds.
"It's been very close to being in different pay-fors before," he said, using the Washington slang for measures that raise revenue to pay for other desired programs.
Rep. Tammy Baldwin (D-Wisc.) is already talking about the issue in her Senate race against former Gov. Tommy Thompson.
"It's just another example of fundamental unfairness in our tax code," Baldwin told HuffPost. "It's tax season in Wisconsin and everywhere, and as I travel around the state, I'm hearing more than just a few people speak out about that.
"They are pulling all their receipts together and filling out their returns and coming up with their calculations, and they're paying at a higher rate than MItt Romney -- a multi-millionaire running for president of the United States," said Baldwin. "They feel that the system is rigged against them, and I think in this respect it is."
Several other Democratic candidates are prepared to weigh in, including Ohio Sen. Sherrod Brown.
"Wealthy hedge fund managers can make more than $2 billion each year, yet pay a lower tax rate than most middle class Ohioans because of a special tax break," Brown told HuffPost. "If hedge fund managers paid the regular income tax rate, we could reduce the deficit by $23 billion over the next decade."
Carried interest is just one of Democrats' targets Democrats. They've also begun a major push for the Buffett Rule, a law named after investor Warren Buffett, aimed at ensuring that billionaires like him don't pay Romney-like rates. Under it, anyone earning $2 million and up would have to pay a 30 percent rate
Baldwin is the sponsor of that legislation in the House, and she said she intends it to cover carried interest, as well.
"The Buffet Rule would address that, but at this time especially when middle class families are taking it on the chin in so many ways, this is adding insult to injury," she said.
What happens next isn’t clear. Democrats in the House cannot move legislation on their own, but could try to attach it to another measure. In the Senate, Majority Leader Harry Reid could move a bill, but his office was not prepared to comment. A Democratic aide said the issue was "definitely on the table."
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