Trump Tax Break for Private Credit Funds Faces Senate Opposition

A tax break for private credit funds, proposed in President Trump’s spending bill, has sparked debate among US lawmakers. The initial provisions of the bill, which passed in the House of Representatives, advocated for significant tax cuts on private credit funds. However, these provisions were later omitted from the Senate’s draft version. The proposed tax break would have reduced taxes on dividends earned through business development companies (BDCs), with some lawmakers hopeful that the proposition could still be added to the final version of the bill.

The Congressional Joint Committee on Taxation estimated that implementing this tax break would result in a $10.7 billion loss in revenue over the next nine years. Despite this, lawmakers continue to deliberate on the proposal, though many believe it is unlikely to pass the Senate. Senator Elizabeth Warren, a Democratic Senator from Massachusetts, is among those who oppose the tax break. She criticized the Trump administration, stating that the tax break would benefit private credit companies at the expense of essential services for American families, such as healthcare, education, and food assistance.

Other lawmakers have also expressed concerns about the spending bill, particularly the combined cuts to Medicaid and the Special Nutrition Assistance Program (SNAP). They worry that these provisions could do more harm than good for Americans. Additionally, there are concerns about the bill’s potential to worsen the national debt. The Congressional Budget Office projected that the bill could add $2.4 trillion to the US debt by 2034. The CBO also noted that the bill would likely have a minimal impact on economic growth, a view shared by Brandon DeBot, policy director at the Tax Law Center at NYU Law. DeBot argued that the bill would primarily benefit high earners, such as private fund investors in BDCs, while slashing resources for the lowest-income households.

Proponents of the bill, however, argue that the provision would 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 and successfully lobbied for tax cuts. BDC experts suggest that a tax break would attract more capital and investors, as BDCs have become increasingly popular due to their high returns. Investment bank reported that BDCs received nearly $44 billion last year, a 70% rise compared to 2023. Industry experts claim that the Republicans who drafted the legislation were convinced that the cuts would “promote capital formation.”

Despite the Senate Finance Committee considering 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. However, advocates are reportedly developing a simplified version to minimize opposition.