Tax cut for private credit funds to slash $10.7B in revenue

US lawmakers are weighing in on a tax break for private credit investors. President Trump’s spending bill that passed in the US House of Representatives, Congress’s last chamber, advocated for billion-dollar tax cuts on private credit funds.

However, the provisions were later omitted from the Senate’s draft version.

The bill’s initial provisions proposed reducing taxes on dividends earned through business development companies; some lawmakers are hopeful they can add the proposition into the bill’s final version.

Senator Elizabeth Warren believes that private credit companies don’t need tax breaks

According to the Congressional Joint Committee on Taxation, a tax break for private credit funds would result in a $10.7 billion loss in revenue for the next nine years. Nonetheless, lawmakers are still deliberating on the proposal, though many believe it would not survive the Senate.

Elizabeth Warren, a Democratic Senator from Massachusetts, is just one of the legislators who oppose the tax break. 

She criticized the Trump administration, saying, “This is what armies of lobbyists and an infinite arsenal of political donations get you: massive tax breaks at the expense of healthcare, education, and food assistance for American families. Private credit companies don’t need a tax break — working people do.”

Other lawmakers have also raised their concerns about some of the provisions of the spending bill, including the combined cuts to Medicaid — the health insurance program for low-income Americans — and the Special Nutrition Assistance Program (SNAP), which helps families afford food. They worry that these provisions would do more harm than good for Americans.

Some are also concerned about the bill’s potential to worsen the national debt. The Congressional Budget Office projected the bill could add $2.4 trillion to the US debt by 2034.

The CBO also noted that the bill would probably do very little to spur growth, which Brandon DeBot, policy director at the Tax Law Center at NYU Law, agrees with.

He argued that the bill would only slash resources for the lowest-income households, while offering significant tax breaks to high earners like private fund investors in business development companies (BDCs).

However, some bill proponents clarified that the provision would help offer fair treatment to BDCs and help classify them similarly to real estate investments, such as REITs. 

In 2017, the real estate industry faced a similar situation. Although lucky for investors, they won their fight after claiming that the corporate tax cuts disadvantaged pass-through vehicles such as REITs. 

BDC experts say a tax break would invite more capital and investors

BDCs have become the in-thing in the last few months, with investors drawn to their high returns. Moreover, Investment bank Robert A Stanger & Co. reported that BDCs received nearly $44 billion last year, a 70% rise compared to 2023. 

Industry experts say a tax break would probably attract more investors and capital. One even claimed the Republicans who drafted the legislation were convinced that the cuts would “promote capital formation.”

Another claimed that while the Senate Finance Committee considered the measure, it was abandoned following lobbying efforts to extend the tax benefits to other funds. With the estimated cost rising, senators opted to withdraw the proposal. Nonetheless, advocates are reportedly developing a simplified version to minimize opposition.

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