June 27 (Bloomberg) -- Treasury Secretary Henry Paulson warned that raising taxes on hedge funds and buyout firms may have ``unintended consequences'' and said Congress shouldn't ``single out'' firms that go public, such as Blackstone Group LP.

``I don't believe it makes sense to single out one industry,'' Paulson said when asked about proposed legislation at a conference hosted by the Wall Street Journal in New York. Senate legislation would force Blackstone to pay taxes at corporate rates of 35 percent instead of as a partnership, with a burden as low as 15 percent. ``We need to be careful dealing with something like this piecemeal,'' Paulson said.

Paulson, the former chief executive officer of Goldman Sachs Group Inc., was the second senior Bush administration official today to raise concerns about efforts to increase taxes on many hedge funds and buyout firms. White House spokesman Tony Snow also suggested the administration will oppose such an effort.

``This is not an administration that's predisposed toward tax increases,'' Snow told reporters this morning. He said at a later briefing that he was speaking generally and wasn't addressing specific legislation.

``We're going to take a look at what Democrats have to offer,'' he said.

Shares Rise

Shares of Blackstone, which traded as low as $29.13 about 15 minutes before Snow's first remarks, jumped 3.5 percent to more than $30.40 afterward. Shares of Fortress Financial Group LLC, the first hedge-fund manager to go public in February, increased as much as 6.2 percent after Snow's remarks. Shares of Blackstone fell 83 cents, or 2.7 percent, to close at $29.92 at 4 p.m. in trading on the New York Stock Exchange. Fortress shares gained $1.18, or 5.32 percent, to close at $23.25.

The tax structure of such funds has drawn congressional attention in the wake of billion-dollar paydays for fund managers.

The Senate legislation, introduced June 14 by Finance Committee Chairman Max Baucus, a Montana Democrat, and Charles Grassley, an Iowa Republican, would stop financial firms that become publicly traded partnerships from using a 20-year-old law that allows publicly traded investment firms that derive 90 percent of profits from passive investments to pay lower taxes.

The broader June 22 House legislation, backed by top Democrats, would tax the share of profits that managers receive for investment services at ordinary income-tax rates as high as 35 percent and affect all partnerships, public and private. Currently, that income, known as ``carried interest,'' is taxed at capital-gains rates as low as 15 percent.

Other Partnerships

The House bill, initiated by Representative Sander Levin, a Michigan Democrat, would also affect other partnerships, including those that invest in commercial real estate and oil and gas pipelines as well as venture-capital firms.

Although Paulson was asked about the Senate bill, he didn't distinguish between the two measures in his comments. More broadly, he said higher taxes on hedge funds and buyout firms would potentially affect other industries that use the partnership model. He also said the issues should be studied in the context of broader tax reform.

``We have tended to single out companies and industries to respond to the pressures of the moment,'' he said. ``We need to think comprehensively. We need to be careful of unintended consequences.''

No Special Treatment

Baucus and Grassley issued a joint statement later in response to Paulson's comments, saying their legislation is intended to equalize tax treatment, not target any one industry.

``We're simply clarifying that private equity firms and similar businesses should not receive special treatment in the tax code,'' they said. ``No one group of businesses should gain an edge over its competitors by subverting congressional intent and claiming a tax status for which they do not qualify.''

The Levin proposal is supported by House Ways and Means Committee Chairman Charles Rangel of New York and Financial Services Committee Chairman Barney Frank of Massachusetts.

Frank said fund managers are getting undue benefits from the tax code.

``I think they are getting a tax reduction they don't deserve,'' he said in an interview yesterday. ``I don't think you should be getting a capital-gains tax for managing other people's money.''

Sharp Rebuke

Levin's proposal has drawn sharp criticism from trade groups representing partnerships.

``It is a blow to capital formation,'' Jeffrey DeBoer, president and chief executive officer of the Real Estate Roundtable, wrote in a letter yesterday to Levin.

Lisa McGreevy, executive vice president of the Washington- based Managed Funds Association, the primary lobbying group representing hedge funds, said last week ``this is not about compensation for services. This is about the nature of long-term investment and capital formation.''

Earlier in the day, Michael Graetz, a Yale University tax professor who served in the tax department of President George H.W. Bush's Treasury Department, endorsed both the Senate measure and the Levin bill.

``I think it's odd'' that fund managers pay lower taxes on their labor income than their secretaries, Graetz told the Senate Finance Committee in Washington.

To contact the reporter on this story: Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net

Last Updated: June 27, 2007 18:40 EDT