Aug. 14 (Bloomberg) -- Blackstone Group LP's first earnings report as a public company may bolster the argument of some U.S. lawmakers that buyout firms ought to pay higher taxes.

Pretax earnings totaled $771.9 million at the New York- based firm in the second quarter. After making provisions for tax benefits as well as payments, Blackstone came out ahead by $2.4 million rather than having an expense.

The credit compared with a $9.6 million tax provision in the year-earlier quarter, when the firm generated only about a third as much revenue. For the first half, this line item fell 26 percent to $11.6 million.

Blackstone's numbers show how much the firm has benefited from paying the 15 percent capital-gains tax rate on partnership income, rather than the 35 percent rate imposed on corporations. Legislation proposed by Senators Charles Grassley and Max Baucus in June would take away that privilege.

The odds that Grassley and Baucus will succeed are 50-50, according to Hojoon Lee, an analyst at Morgan Stanley in New York. Lee, in a report published yesterday, wrote that his price estimate on the firm's shares includes a $3 discount for the pending legislation.

Lee started coverage of Blackstone with a forecast of $31, the same as the initial public offering price in June, and an ``outperform'' rating. The shares closed yesterday at $25.71.

Legislative Plans

There's a 20 percent chance that the firm's shares will be worth only $23, according to his report. That figure, he wrote, assumes the Grassley-Baucus bill passes and a ``sharper-than- expected reduction in risk appetite'' occurs among investors.

Grassley, an Iowa Republican, is his party's highest- ranking member on the Senate Finance Committee. He said last week that his proposal will be tied into an effort to protect millions of households from paying the alternative minimum tax, a system that limits their deductions and exemptions.

Grassley and Baucus, a Montana Democrat who chairs the committee, want to force hedge funds as well as private-equity firms to pay corporate-tax rates. Blackstone would be exempt from the increase until 2012 as a publicly traded partnership.

The U.S. isn't the only country where the tax issue has arisen. U.K. lawmakers are considering whether to change rules that allow private-equity firms to pay 10 percent tax on their profits, rather than the highest rate of 40 percent.

Pro Forma Numbers

Blackstone's earnings report includes so-called pro forma numbers, assuming the firm went public before the beginning of last year, that have higher tax rates built into them.

On this basis, the firm made $515.5 million in the second quarter, a more than fourfold increase from a year earlier. Pro forma tax provisions were about 13.5 percent of pretax earnings in both periods.

Blackstone may end up with a 38 percent to 40 percent rate if the Grassley-Baucus legislation passes, Morgan Stanley's Lee said in his report. These kinds of numbers show not only what's at stake for the firm, but also how much attention its tax bill last quarter may attract.

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Kohlberg Kravis Roberts & Co., by filing an amended prospectus for its initial public offering, signaled that turmoil in credit markets won't stop the buyout firm from pursuing the $1.25 billion share sale.

At the same time, the revised document more prominently noted the risks facing the New York-based firm -- starting with the proposed changes in U.S. tax law, cited on page two. The first version, sent to the Securities & Exchange Commission on July 3, waited until page 12 to introduce the issue.

The new version also provided a more precise definition of ``difficult market conditions,'' the first item in a section on business risk. KKR said the cost of financing buyouts with high- yield debt has ``increased significantly.'' The firm may have to depend on investment banks for loans and accept more restrictive terms, the filing said.

These issues haven't stopped KKR from proceeding with the two biggest pending buyouts -- a $32 billion deal for TXU Corp. and a $25.6 billion purchase of First Data Corp. -- so it's understandable that they wouldn't interrupt the IPO plans.

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Forest products have become a stock-market theme of choice for index providers seeking new ways to attract the attention of institutional investors.

Standard & Poor's just introduced an index composed of 25 of the largest timber and forestry companies worldwide. The gauge is among six that S&P, a unit of McGraw-Hill Cos., classifies as Global Thematic Indices.

The introduction follows the February rollout of the World Timber Index, a 15-company benchmark that Societe Generale and Dow Jones & Co. put together. The index's members include five North American companies -- Weyerhaeuser Co., Plum Creek Timber Co., Rayonier Inc., Canfor Corp. and Sino-Forest Corp. -- that carry the most weight in the S&P indicator.

S&P's timing could have been better. The World Timber Index has declined 15 percent since July 19, when share prices peaked globally. The retreat wiped out almost all of the index's gains since its debut. Weyerhaeuser, which posted an 89 percent drop in second-quarter profit, has lost 18 percent.

To contact the writer of this column: David Wilson in New York at dwilson@bloomberg.net

Last Updated: August 14, 2007 00:08 EDT