July 25 (Bloomberg) -- Democratic Senator Charles Schumer of New York is fighting a plan to raise taxes on hedge funds and buyout firms with his own legislative poison pill: a demand that other powerful interests share any pain.

Schumer is expressing concern about plans by lawmakers including Republican Senator Charles Grassley that would more than double taxes on private-equity and hedge-fund firms or their managers. He told the Senate Finance Committee this month that he would agree to the proposals only if taxes were also raised on oil-and-gas, venture-capital and real-estate partnerships.

Schumer may be trying to shield both his Wall Street constituents and his party's electoral war chest, Grassley said. The Democratic Senatorial Campaign Committee, which Schumer heads, received $779,100 from employees of private-equity firms and hedge funds in June, six times their combined total in June 2005, federal filings show. That far exceeds the industry's contributions of about $60,000 to the Republican Senate committee.

``They contribute most of their money to the Democrat party, and he wants to protect the income,'' Grassley, the ranking Republican on the Senate Finance Committee, said in an interview. ``It's completely contrary to the position he took in the last election when he was leading the Senate Democratic campaign committee and he talked about the inequity of the tax system.''

Schumer said the industry's donations to the campaign committee haven't influenced his thinking on the issue. ``We are going to try to do the right thing on this, and I am making up my mind on the merits,'' Schumer, 56, said in a July 18 interview.

Ethanol Partnerships

The issue may become even more personal for Grassley, 73, because Schumer's plan would derail a proposed $69 million tax break for publicly traded partnerships that transport and store ethanol, a major industry in Grassley's home state of Iowa. It would also undermine a priority of Schumer's by eroding a similar proposed tax break for the mitigation of carbon dioxide.

The finance committee approved those breaks June 19, a week after Grassley and the panel's Democratic chairman, Max Baucus of Montana, introduced the measure targeting the financial firms.

Striking out at others may give Schumer and other opponents of raising taxes on hedge funds and buyout firms their best chance of killing the legislation.

Across the Board

``If I were them and I wanted to kill the bill, I would say, `Don't just tax me, you have to look at everyone else,''' said Yves Siegel, managing director for equity research at Wachovia Securities Inc. in New York, who focuses on publicly traded energy partnerships such as Kinder Morgan Energy Partners LP.

Schumer is echoing the position taken by the Private Equity Council, a Washington trade group set up by Blackstone Group LP, the Carlyle Group, and Apollo Management LP, which are attempting to defeat the congressional assault on their tax rate on the grounds that they are being unfairly singled out.

``There is genuine concern that singling out one portion of one industry for a tax increase would create some very inefficient economic behavior that would probably not help the country,'' said Robert Stewart, vice president of communications for the Private Equity Council.

At the finance committee hearing on the issue a week earlier, Schumer said, ``I will not stand for treating financial- services partnerships one way while all the other partnerships are treated another way.''

Corporate Rates

At issue is the way private-equity firms such as Blackstone that go public should be taxed. Currently, investors pay taxes at rates as low as 15 percent on their share of the firm's income; companies pay a tax rate of as much as 35 percent before paying shareholder dividends, which are also taxed.

Lawmakers are also looking at the ability of fund managers to pay the lower 15 percent capital-gains rates on the share of a fund's income that they receive as profits. New York's other senator, Hillary Clinton, has said those managers should pay ordinary income rates -- as high as 35 percent -- joining her rivals for the Democratic presidential nomination, Illinois Senator Barack Obama and former North Carolina Senator John Edwards, in calling for higher taxes.

Schumer has an ally in Senate Majority Leader Harry Reid, a Nevada Democrat who is relying on the funds raised by Schumer's DSCC to ensure that the party maintains or expands its control of the chamber in next year's elections. Reid, 67, said in an interview last week that any efforts to raise taxes ``shouldn't apply just to the private-equity groups, it should apply to all that are similarly situated.''

Hedge-Fund Executives

Contributors to Schumer's DSCC last month include executives at several hedge funds that would be affected by Grassley's tax measure. Among those are Wesley Edens, chief executive officer of Fortress Investment Group LLC, who gave the maximum $28,500 donation to the committee, as well as Harold Kelly and David Windreich, investment managers at Och-Ziff Capital Management Group LLC, who each gave $10,200, federal records show. Och-Ziff earlier this month said it planned to raise $2 billion in a share sale.

Energy companies helped by the same tax benefits now claimed by financial firms such as Fortress are a small, yet rapidly growing, sector. Siegel said there are currently 64 such firms with a market value of about $134 billion, up from seven with a combined market value of $2.1 billion in 1994.

Passive Investments

The energy partnerships, which include builders of oil and gas pipelines and managers of coal plants, rely on a 1987 exception in the tax code that offers favorable tax treatment to publicly traded partnerships that earn more than 90 percent of their income from passive investments. The bill approved by the finance committee this month would extend that break to publicly traded partnerships that transport and store ethanol, a corn- based fuel additive.

About a half-dozen other firms that aren't in the energy sector also claim this tax benefit. They include Cedar Fair LP, which operates the Sandusky, Ohio Cedar Point amusement park, and ML Macadamia Orchards LP, maker of Mauna Loa-brand nuts. AllianceBernstein Holding LP, another financial-services firm, also gets the tax treatment, but must pay 3 percent of its assets in tax every year to the government.

Grassley has been a supporter of the ethanol industry because Iowa has more ethanol biorefineries in production and under construction than any other state, according to the Renewable Fuels Association, a Washington trade group.

Different Treatment

The Private Equity Council's Stewart said the finance committee's vote to approve the ethanol-related tax break undermines the case for boosting taxes on fund managers. ``If people really believed that the current law creates a tax loophole for publicly traded partnerships, I don't understand why they would want to expand it for one industry while taking it away from another,'' Stewart said.

Grassley said the legislation ``prohibits a firm from exploiting a loophole to get a tax break.''

``The bill may appear to focus only on firms in the private equity and hedge fund management industries that choose to go public, but the investment management business is really the only active business that has tried to rely on the passive income exception,'' Grassley said.

The fight over the taxation of buyout firms and hedge funds isn't the first time Schumer has gone to bat for New York-based companies that are among his top donors. In 2000, Schumer was among several dozen lawmakers who wrote letters to then- Securities and Exchange Commission Chairman Arthur Levitt questioning a proposed SEC rule that would bar accounting firms from providing consulting services to companies they audit. That practice was restricted two years later as part of the overhaul of accounting industry laws after the collapse of Enron Corp.

Two of Schumer's leading contributors from 1995 to 2000 were top accounting firms, according to the Center for Responsive Politics, a Washington-based group that tracks money in politics.

To contact the reporters on this story: Julianna Goldman in Washington at jgoldman6@bloomberg.net; Ryan J. Donmoyer in Washington at rdonmoyer@bloomberg.net.

Last Updated: July 25, 2007 17:30 EDT