HR-1091-119
Referred to the House Committee on Ways and Means.
Sponsored by Marie Perez (D-WA)
What it does
This bill would treat income and gains that investment managers receive through "investment services partnership interests" (often called carried interest) as ordinary income instead of lower-rate long-term capital gains. It would also add self-employment tax on that income, repeal the current three-year holding rule in section 1061, and add a 40 percent penalty for certain underpayments tied to avoiding the new rules. Exceptions would apply for the portion of an interest tied to capital the manager invested, for domestic C corporations, and for certain publicly traded partnerships (with a 10-year transition), and other limits apply. The main rules would apply to taxable years ending after enactment, with partial-year and disposition rules.
Who benefits
Federal revenue, if the change raises collections. Taxpayers who earn wages taxed as ordinary income and who argue the current system treats fund managers more favorably. Social Security and Medicare, which could receive added self-employment tax payments. Advocates of uniform treatment of service income across occupations.
Who is hurt
Private equity, hedge fund, venture capital and real estate fund managers, who would likely pay higher tax on profit shares. Fund firms that may restructure compensation or incur compliance costs. Some publicly traded partnerships that could lose qualifying status after the transition period. Possibly investors or portfolio companies if managers pass costs along, though the size of such effects is uncertain.
Supporters argue
Supporters argue that carried interest is payment for managing other people's money, so it is compensation for services and should be taxed like wages and other ordinary income. They contend the current treatment lets some of the highest earners pay lower rates than many salaried workers, and that ending it would raise revenue and make the code more consistent, as the 2017 three-year holding rule only partly addressed.
Opponents argue
Opponents argue that carried interest is a return on risk-taking and entrepreneurial effort, similar to a founder's equity stake, and that taxing it as ordinary income would discourage investment in startups, real estate and small businesses. They contend the 2017 three-year holding rule already tightened treatment, and that the bill's broad definitions, added self-employment tax and 40 percent penalty create complexity and could catch ordinary partnerships.
Constitutional context
Congress's power to lay and collect taxes under Article I, Section 8, and the Sixteenth Amendment's authority to tax income without apportionment, cover this change in how income is classified and taxed; Moore v. United States (2024) left open the realization question, but this bill taxes realized or allocated partnership income. As a revenue measure it must originate in the House, which it did, and the prospective effective date limits Fifth Amendment retroactivity concerns.
Checks and balances
Congress changes tax law and gives Treasury regulatory authority on definitions, anti-abuse rules and valuation; the IRS enforces, and courts review disputes, with the President able to sign or veto.
Historical precedent
Similar carried interest bills have been introduced repeatedly since 2007, and the 2017 Tax Cuts and Jobs Act enacted section 1061, which imposed a three-year holding period but did not fully recharacterize the income.