Economic Update — Real Estate Limited Partnerships to See Higher Tax Rates?

The latest from the White House, which has been a absolute whirlwind of activity in the last month, is a proposal floated over the weekend to cut the federal deficit in the medium term by raising taxes on the wealthy and by winding down the war in Iraq, among other steps. Currently the annualized federal deficit is about $1.3 trillion, which is on its way to $1.5 trillion, counting the stimulus. The Obama proposal would take that to $533 billion by the end of his term. Besides allowing Bush-era tax cuts to expire in 2010, the proposal would reportedly tax the investment income–“carried interest,” it’s sometimes called–of hedge-fund and private-equity partners at ordinary tax rates, which now are as high as 35 percent, and which could go up to nearly 40 percent. Currently carried interest is taxed at the capital gains rate of 15 percent. This proposal has come up before. In 2007, a bill to do exactly that was introduced in the U.S. House of Representatives, but it went nowhere. That was then, this is now. Taxing hedge fund and private-equity managers is bound to look more appealing in 2009 than it did in 2007, both to Congress and the public. But the question is whether the increase will also apply to limited partnerships across the board, of which hedge funds and private-equity manages are only one class, albeit a well-known and well-compensated class. Commercial real estate interests should be concerned about the proposal because so much ownership in real estate is structured as limited partnerships, though it isn’t clear yet whether they would be affected by the higher rates. More details about the president’s tax and budget proposals will become public later this week. Higher taxes on the wealthy may not go down very well on Wall Street this week, but then again Wall Street hasn’t a very cheerful place lately anyway, reportedly because investors in financial stocks are worried that the federal government will nationalize some of the largest and most crippled banks. Smart money isn’t necessarily betting against the nationalization of such banks, but it does seem likely that the administration will have to spend some time dreaming up new terminology (“temporary receivership” or “proactive stabilization initiative,” perhaps?) so that bad-old socialist term “nationalization” won’t be used. In any case, the Dow Jones Industrial Average ended down 100.28 points on Friday, or 1.34 percent, while the S&P 500 was down 1.14 percent and the Nasdaq was down 0.11 percent.