Will Kyrsten Sinema Kill the Democrats’ Climate Deal for a Tax Loophole?

Can Democrats actually pass a serious climate action plan?

The answer may depend on how far a single Democratic senator, Kyrsten Sinema of Arizona, will go to save a tax loophole cherished by Wall Street tycoons. 

Democrats stunned Washington D.C. and climate activists last week by rolling out a compromise deal between the notoriously pro-fossil-fuel Senator Joe Manchin, Democrat of West Virginia, and the Democratic Senate Majority Leader Chuck Schumer—at a moment when many observers thought hope for an agreement was lost.  

But now Democrats need every member of their party to vote for the plan in the evenly balanced 50-50 Senate. And Sinema is refusing to say whether she supports the deal or not. What’s more, Sinema has, in the past, opposed one of its key components: Tightening the so-called “carried interest” tax loophole, which mega-wealthy hedge fund and private equity barons rely on to pay lower tax rates on their income than people who earn a regular salary.

The result is that Democrats’ plan to slow humanity’s advance towards the fiery cataclysm could falter if Sinema and Manchin can’t agree on whether to raise taxes on some of the richest people in the U.S.

Manchin has insisted the loophole must go. 

“The only thing I was adamant about is the carried interest,” Manchin told reporters on Thursday. “Enough’s enough for the one-tenth of the 1 percent of the wealthiest people in the country to have an advantage.”

Manchin said he’d be open to some further negotiation. But he also said that he doesn’t want to see the carried interest provision dropped from the deal. 

“I’m not prepared to lose it,” Manchin said.

Sinema, by contrast, isn’t saying anything.  

On Thursday, Sinema retreated briskly from the Capitol while trailed by reporters attempting to coax a comment from her. 

Sinema has generally opposed raising income taxes during negotiations on previous versions of the current deal.  The Democratic chairman of the House Ways and Means Committee, Rep. Richard Neal, has tried to convince her that there’s an economic case for higher taxes, but that he couldn’t convince her, according to Bloomberg News. 

Sinema’s spokesperson said the senator planned to spend last weekend reviewing the details, and that she wants to hear from the Senate parliamentarian about whether the plan will technically qualify to be passed using reconciliation—the procedure that allows the Senate to approve a bill with only 50 votes instead of 60. 

Sinema is “reviewing the text and will need to review what comes out of the parliamentarian process,” her spokesperson, Hannah Hurley, told Bloomberg on Thursday. 

Sinema was not involved in the negotiations between Manchin and Schumer, according to Manchin. And now there’s little telling what she might be thinking.

Both former President Donald Trump and Former President Barack Obama tried to get rid of the carried interest tax loophole in the past, without success. The provision allows big-time Wall Street investors to tax much of their income under the lower capital gains tax rate, which maxes out at 23.8 percent, rather than the higher rate paid by regular wage earners, which can reach up to 37 percent.

Manchin’s plan doesn’t completely get rid of the loophole. Instead, Wall Street fat cats would simply have a harder time using the tax trick.

“This doesn't completely close the loophole,” Kimberly Clausing, a former tax official for the Treasury Department, told Insider over the weekend. “It only partially does by lengthening the amount of time that you have to hold the investment for it to qualify as a capital gain.”

The change would raise only $14 billion over 10 years by tightening the carried interest loophole, which represents only a tiny slice of the broader $739 billion that would be generated by the plan, including by introducing a 15 percent flat tax on corporations and enhancing IRS tax enforcement. 

The climate impact of the plan could be significant. The bill provides tens of billions of dollars in tax cuts and subsidies for a wide range of clean-energy investments and initiatives, including new and used electric vehicles, decarbonizing heavy industry, and subsidies for households to buy climate-friendly heat pumps and rooftop solar panels.  

Schumer and Manchin claim their plan will cut U.S. emissions by 40 percent compared to 2005 levels by the year 2030. If that turns out to be true, it will go more than two-thirds of the way to Biden’s stated goal of a 50 percent reduction this decade. 

Manchin said last week that he believed the Senate could approve the deal by this Friday, Aug. 6. 

But for now, it’s all eyes on Sinema—and her position on that one weird tax trick—to determine whether the plan moves forward.

Follow Greg Walters on Twitter.