End may be near for hedge fund tax break

NEW YORK (CNNMoney.com) -- Tax-writing committees in Congress are weighing a curtailment of a little-known tax break that helps private equity firms and hedge funds cut their tax bills, according to a newspaper report published Thursday.

The proposal, separate from recent legislation that would affect private equity firms that go public, would have far-reaching consequences for the industries and could raise $4 billion to $6 billion a year for the federal government as it seeks to ease the burden of the alternative minimum tax on large numbers of taxpayers, The New York Times reported.

The proposal would target a little-known practice that allows private equity and hedge funds to pay only 15 percent instead of 35 percent, the ordinary top tax rate, on capital gains generated on performance fees, the source of most of the firms' income, according to the newspaper.

In addition to hedge funds such as Fortress Investment Group LLC (Charts), the change in tax code would also hit venture capital firms, real estate partnerships and numerous oil and gas companies that use similar accounting in order to pay a lower tax rate, the Times reported.

The bill is being sponsored by Senate Finance Committee Chairman Max Baucus (D-Mont.) and ranking member Charles Grassley (R-Iowa). In the House, Chairman of the Ways and Means Committee Charles Rangel (D-N.Y.) has announced plan to hold hearings on the proposal after the July 4 recess, the paper reported.

Opponents of the bill, including the U.S. Chamber of Commerce and the recently organized Private Equity Council, are focusing their lobbying efforts against it. A senior aide in the Senate described the bill to the Times, saying, "The story will be 'Tax the wealthy private equity guys to make sure kids go to college, or to help kids in poverty.'"

The alternative minimum tax was conceived as a way to recoup revenue from wealthy taxpayers, but in recent years it has begun to hit middle-income families.