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http://www.washingtonpost.com/politics/in-cantor-hedge-funds-and-private-equity-firms-have-voice-at-debt-ceiling-negotiations/2011/07/22/gIQAZYNVYI_story.html?hpid=z1

By Alec MacGillis, Monday, July 25, 9:44 AM

As the debt ceiling talks tick down to the Aug. 2 deadline, leading the opposition to any deal that includes higher taxes is the new tribune of rank and file House Republicans: Majority Leader Eric Cantor of Virginia.

It was Cantor who walked out of talks with Vice President Biden over White House demands for new revenue, who torpedoed an initial attempt by President Obama and Speaker John A. Boehner to reach a “grand bargain” and who was invited for last-ditch talks with Obama and Boehner that collapsed Friday night.

Cantor’s pivotal role marks a rapid rise to power for the 48-year-old from the Richmond suburbs. It also represents a major coup for sectors of the investment community that Cantor has been striving to assist for several years — on the same tax issues that have been at stake this month. And so far, Cantor has prevailed on those issues.

Among the White House’s top demands for new revenue are changes in the tax code affecting hedge funds, private equity firms and real estate partnerships, which would raise an estimated $20 billion over 10 years.

For the past four years, Cantor has taken the lead in the House on fighting the same changes. He also has been one of the top recipients of contributions from those industries — last year, his two fundraising committees received nearly $2 million from securities and investment firms and real estate companies, more than double the figure for Boehner (R-Ohio).

The hedge fund and private equity proposals were at the center of Cantor’s break with Biden’s team. Since then, the prospect for any immediate tax increases has declined, with the focus turning instead to a package based on spending cuts, with broader tax reform postponed.

This dismays Democrats, in part because Cantor has managed to cast his defense of the investment tax treatment as part of the broader Tea Party-fueled anti-tax orthodoxy. To Democrats, Cantor embodies the convergence of Tea Party and business interests, which was reflected in the surge of Wall Street contributions to Tea Party candidates last fall, but is often obscured by the Tea Party’s anti-Wall Street rhetoric.

“This [anti-tax stance] isn’t all coming up from the grass roots,” said Rep. Chris Van Hollen (D-Md.) “This goes to some longtime cozy relationships between House Republicans and hedge fund managers in the financial sector.”

A spokesman noted that Cantor has always been against raising the investment taxes in question, but declined to comment further.

Cantor himself has said repeatedly that Obama and other Democrats are exaggerating for political gain the value of closing tax loopholes for financiers. While Cantor opposes closing the loopholes to raise revenue, he says he is open to closing them as part of broader tax reform that lowers overall tax rates.

“So I know it makes for good politics to throw the shiny ball out there … that somehow Republicans are wed to that kind of policy to sustain these preferences, when all along, in our budget and in our plan, we have said we’re for tax reform, we have said we’re for bringing down rates on everybody,” he said on the House floor last week.

Jennifer Thompson, a political science professor at Virginia Commonwealth University and former Republican campaign operative, said Cantor’s longtime opposition to the investment tax provisions is a sincere reflection of his conservatively inclined district.

“Eric Cantor is a Virginian and you can’t separate too much from that fact,” she said. “His constituents are very much aligned with the no taxes and being back in the black and that’s what Eric Cantor represents.”

Members of Congress from both parties have cultivated the investment community, but Cantor, whose wife is a former Goldman Sachs vice president, has enjoyed particularly strong ties. In 2006, his campaign committee and his leadership PAC, established to support other Republicans, collected $682,500 from securities and investment and real estate firms, far more than any other Republican on the Ways and Means Committee and nearly double the take of then-chairman Charles Rangel (D-N.Y.).

Cantor sprang into action when, in 2007, the new Democratic majority first proposed the two major changes to the tax code that have been at the center of this month’s debt talks. He formed the “Coalition for the Freedom of American Investors and Retirees” and invited several dozen industry groups to the kick-off meeting.

One of the changes revolves around “carried interest,” the pay that managers get for the gains they produce for investors, which is taxed at the long-term capital gains rate of 15 percent. Many tax experts argue it should be taxed at the 35 percent rate for ordinary income because it is the managers’ compensation for services performed, not the result of their own capital investment.

Another proposal would tax profits from the sale of hedge funds as ordinary income.

Since 2007, Cantor has railed against the proposals in interviews and in House hearings, saying that changing the tax treatment of carried interest would “raise taxes on innovation and opportunity in America” and harm “mom and pop” business partnerships.

The Democratic sponsors of the proposals dismiss that argument. “There is virtually no evidence that having these people pay ordinary income would inhibit business development,” said Rep. Sander Levin (D-Mich). “This is not an issue relating to mom and pop operations.”

The proposals passed the House, which was then under Democratic control, but fell short of a filibuster-proof majority in the Senate last year.

Cantor’s support from the industries soared. Contributions to his two campaign committees from the real estate and securities and investment sectors jumped to $916,307 in 2008 and doubled to $1.85 million in 2010, making them his top sources of support, according to the Center for Responsive Politics.

The top 10 contributors to Cantor’s two committees in 2010 included three investment firms: employees at SAC Capitol Advisers, the hedge fund founded by Steven Cohen, gave $64,964; those at the private equity firm KKR gave $52,600; and those at Elliott Management, the hedge fund founded by Paul Singer, gave $44,198. The Blackstone Group, the hedge fund run by Steve Schwarzman, and its employees gave $26,100.

Hedge funds and private equity firms have ramped up their lobbying amid the debt talks. The Private Equity Growth Capital Council has spent $1.58 million lobbying so far this year; the Managed Funds Association has spent $2.64 million; and individual firms have spent heavily on their own, including $2.5 million this year by Blackstone.

Lobbyists said in interviews that it has been highly beneficial to have Cantor as a lead negotiator. And it didn’t hurt that Cantor’s opposition to the specific proposals had blended into the Tea Party’s overall anti-tax stance, said one lobbyist, speaking on the condition of anonymity.

“It’s hard in this particular battle to disaggregate who cares deeply about the [financier] issue versus who wants no breach on the anti-tax side,” the lobbyist said.

Read more on PostPolitics.com

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Eric D. Schwerin
Rosemont Seneca Partners, LLC
1010 Wisconsin Ave., NW
Suite 705
Washington, DC 20007
(202) 333-1880
eschwerin@rosemontseneca.com
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