Justin Elliott

Susan Collins backed down from a fight with private equity. Now they’re underwriting her reelection

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

In late November 2017, Senate Republicans were racing to secure the votes for their sweeping tax overhaul. With no Democrats supporting the bill and even some Republicans wavering, Sen. Susan Collins, the Maine Republican, found herself with enormous leverage.

The day before the vote, she offered an amendment to make the legislation, which lavished tax cuts on corporations and the wealthy, more equitable. It expanded a tax credit to make child care more affordable. To pay for it, she took aim at a tax break cherished by the private equity industry.

Then Collins backed down. The day after she introduced it, as the Senate voted on the bill, a Republican Senate aide told a Treasury Department official that Collins was “no longer offering her amendment," according to emails obtained by ProPublica through a Freedom of Information Act lawsuit. Her retreat was a significant victory for Senate Majority Leader Mitch McConnell. Collins put aside her opposition and voted for the bill, which passed 51-49.

Her turnabout has been one of the mysteries surrounding the $1.5 trillion tax bill, which slashed the corporate rate. The new emails and interviews shed light on how quickly Collins climbed down from her amendment proposal and how the industry maneuvered to preserve the break in the new law, which remains President Donald Trump's most important legislative achievement.

Nearly three years later, Collins is facing a tough reelection battle and the private equity industry has become her most reliable source of donations. She has gotten more than half a million dollars in campaign contributions from the private equity industry this cycle, more than any other senator, according to the Center for Responsive Politics, which tracks political donations.

What's more, Steve Schwarzman, the billionaire chairman and chief executive of the private equity giant Blackstone, has given $2 million to a super PAC backing her. (Schwarzman, a major Republican donor, has also given $20 million to a super PAC supporting Collins and other Republican Senate candidates.) The failure of Collins' amendment likely saved Schwarzman alone tens of millions of dollars in taxes, according to tax experts.

Annie Clark, a Collins campaign spokeswoman, said Collins secured other significant changes to the bill. The amendment cutting carried interest stood no chance because it would've required 60 votes to pass if the Senate had voted on it, she said.

“Given the opposition to the amendment at the time — not only from Republicans, but from Democrats as well — it would certainly have failed," Clark said in a statement.

A Schwarzman spokeswoman said in a statement, “Steve has long supported Senator Collins because of her independence, hard work and integrity. He does not closely follow all of her specific policy positions."

The carried interest loophole, as its critics, including Collins, have called it, has long been the target of reform efforts.

The tax break is especially lucrative for the private equity industry, which invests in non-public businesses. A major way that executives at private equity firms like Blackstone make money is by taking a share of profits when the companies they invest in are sold.

The debate over carried interest centers on how this money should be taxed: as an investment return for private equity executives or a bonus that the firm's clients pay for good performance. Today, it's treated like an investment and taxed at a lower capital gains rate. If it were counted as a bonus, it would be taxed like part of the executives' salaries, at the higher ordinary income tax rate. That discount — currently around 20 percentage points — in what Wall Street executives owe to the government quickly adds up to tens of billions of dollars.

When Trump became president and Republicans started pursuing an overhaul of the tax code, private equity had reason to be worried. The party had a long wish list of tax cuts but a limited number of ways to pay for them without increasing the deficit by more than Senate rules allowed, $1.5 trillion over 10 years. Eliminating carried interest, as Trump had proposed, was one of them.

And the tax break had faced years of opposition. The Obama administration made an ultimately unsuccessful attempt to raise the carried interest tax rate, an effort that Schwarzman famously compared to the Nazis invading Poland. (He later apologized for the analogy.)

Trump himself repeatedly complained about carried interest during his presidential campaign. “These are guys that shift paper around and they get lucky," he said in 2015. “They are paper-pushers. They make a fortune. They pay no tax. It's ridiculous, OK?"

To blunt the effort, the American Investment Council, the industry's Washington trade group, proposed a concession it hoped would mollify lawmakers who might consider killing the loophole. AIC pitched House Republicans on modestly extending the amount of time that hedge funds, private equity firms and others must hold onto investments to qualify for the tax break, according to three people familiar with the matter.

That's exactly what happened. Rep. Kevin Brady, R-Texas, the chairman of the House Ways and Means Committee, proposed tweaking carried interest rather than eliminating it. The holding period would change from one year to three years — a change that tax experts say does little to close the loophole.

“It's laughable. Almost nobody will end up paying any additional tax. Tax planners have a million ways to Sunday to try to avoid it, some more legitimate than others, and the IRS is notoriously inept at auditing these types of issues," said Gregg Polsky, a former corporate tax lawyer who is now a professor at University of Georgia law school.

But the loophole still faced a threat. AIC had identified Collins as a senator who might come after carried interest, according to two people familiar with the matter, and on Nov. 30, Collins spoke on the Senate floor to pitch a handful of amendments to the bill.

One priority, she said, was to alleviate the burden on poor families of the costs of care for children or elderly relatives. And to raise money for this new government subsidy, she would roll back Wall Street's carried interest tax break.

“These are the lowest income families who need help the most in paying for child care or care for a dependent, elderly parent or grandparent or other relative; yet virtually none of them qualify for the credit," Collins said. “To pay for making the child and adult dependent care credit refundable, my amendment would close the carried interest loophole, a tax reform that the president has endorsed."

Collins' staff had reached out to academics who specialize in the arcane details of carried interest to help them craft the legislative language, according to one Senate tax aide. She settled on upping the holding period from three years, as Brady has proposed, to eight — which, experts say, would have significantly eroded the tax break's value.

As the Senate was moving toward passing the bill the day after Collins pitched her amendment, Drew Maloney, the Treasury Department's assistant secretary for legislative affairs, emailed the chief of staff to Sen. Rob Portman, R-Ohio, asking what had “happened with carried interest."

“Collins no longer offering her amendment," replied Portman's chief of staff, Mark Isakowitz.

Collins “[c]ame up with a different pay for to fund her medical expense deduction so she isn't offering it any more," Isakowitz continued.

It's unclear exactly what Isakowitz meant; he appears to have conflated Collins' amendment to expand the child and dependent tax credit — for which closing the carried interest loophole was a “pay for," Washington jargon for a revenue-generating measure that offsets a tax cut — with another amendment she proposed retaining a tax deduction for medical expenses and lowering the income threshold necessary to claim it.

Maloney declined to comment. So did Isakowitz, who now runs Google's Washington office.

It's not clear exactly why Collins dropped her last-minute, long-shot attempt to kill carried interest. Three other amendments that Collins introduced on the same day made it into the bill, including an expansion of the medical expense tax deduction and preserving taxpayers' ability to deduct up to $10,000 in state and local income taxes from their federal tax returns.

Clark, Collins' spokeswoman, said the senator continues to support closing the carried interest loophole to pay for an expansion of the child and dependent care tax credit, but the lack of support for it at the time meant the amendment “had absolutely no chance" of making it into the bill.

“Any claim that Senator Collins didn't pursue this amendment because of any lobbying effort is completely false," she said. “Anyone who knows her knows that she always does what she thinks is right. Any insinuation to the contrary is false — and an insult to her integrity."

Maloney, who, internal Treasury emails show, kept close tabs on the carried interest issue throughout 2017, left the administration six months after the tax overhaul passed to take a job running the American Investment Council, the private equity trade group. He later hired Brad Bailey, another top Treasury Department official, to work as one of the trade group's lobbyists.

Another Treasury Department official, Jared Sawyer, has lobbied for AIC since leaving the administration to take a job at a lobbying firm. And Eli Miller, the chief of staff to Treasury Secretary Steve Mnuchin, who was deeply involved in the tax overhaul, left government last year to become a government relations executive at Blackstone.

While Collins' Democratic opponent, Sara Gideon, has outraised Collins' campaign, Wall Street billionaires have stepped up to boost the pro-Collins 1820 PAC, which can accept unlimited donations and has spentheavily on TV and other ads. Schwarzman is the group's single-largest donor. Behind him is Ken Griffin of Chicago hedge fund giant Citadel, who has chipped in $1.5 million.

Citadel's lobbying disclosures show the firm lobbied Congress on the carried interest issue in 2017, as well as the broader tax bill. A Citadel spokesman pointed to Griffin's comments several years ago on carried interest.

“Almost all the income that we generate is short term in nature," Griffin said in 2013. “So my tax rate is pretty much the highest federal marginal rate. So I don't have a lot of skin in the game on this issue from my personal vantage point but I have an interest in this as a matter of principle."

Griffin then said he believed the current favorable tax treatment of carried interest should be maintained.

Gideon has no similar outside group supporting her and her campaign has received $242,000 in donations from people who work in private equity, according to the Center for Responsive Politics. A narrow favorite in the race, Gideon has attacked Collins for her support of the tax overhaul.

In December 2017, when it became clear that, despite the president's promises, the tax bill would not meaningfully address carried interest, Axios' Mike Allen asked Gary Cohn, the director of Trump's National Economic Council, what he would change about the bill if he could change one thing.

“We would've cut carried interest," he replied. “We hit opposition in that big white building with the dome at the other end of Pennsylvania Avenue every time we tried."

When Allen pressed Cohn to explain what had happened, he alluded to the power that hedge funds, private equity and venture capital wield in Washington. “Look, the reality of this town is that constituency has a very large presence in the House and the Senate, and they have really strong relationships on both sides of the aisle," he said.

Now the industry is preparing to fight the same battle again. Joe Biden has proposed raising capital gains taxes for those who make at least $1 million a year to equal the income tax rate, effectively eliminating the carried interest loophole for the richest Americans.

Biden's plan to kill carried interest does not appear to have dented his support from private equity.

Jon Gray, Blackstone's president, hosted a fundraiser for Biden in July and introduced him at another one earlier this year. Tony James, another top Blackstone executive, hosted one in June. (Gray and James have also given a combined $2.25 million to the Senate Majority PAC, which supports Democratic Senate candidates including Gideon.) And Alex Katz, a former aide to Senate Minority Leader Chuck Schumer who now works in government relations for Blackstone, is raising money for Biden's transition effort.

The Biden campaign declined to comment.

The Justice Department unleashes prosecutors to potentially intervene in the election

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

The Department of Justice has weakened its long-standing prohibition against interfering in elections, according to two department officials.

Avoiding election interference is the overarching principle of DOJ policy on voting-related crimes. In place since at least 1980, the policy generally bars prosecutors not only from making any announcement about ongoing investigations close to an election but also from taking public steps — such as an arrest or a raid — before a vote is finalized because the publicity could tip the balance of a race.

But according to an email sent Friday by an official in the Public Integrity Section in Washington, now if a U.S. attorney's office suspects election fraud that involves postal workers or military employees, federal investigators will be allowed to take public investigative steps before the polls close, even if those actions risk affecting the outcome of the election.

The email announced “an exception to the general non-interference with elections policy." The new exemption, the email stated, applied to instances in which “the integrity of any component of the federal government is implicated by election offenses within the scope of the policy including but not limited to misconduct by federal officials or employees administering an aspect of the voting process through the United States Postal Service, the Department of Defense or any other federal department or agency."

Specifically citing postal workers and military employees is noteworthy, former DOJ officials said. But the exception is written so broadly that it could cover other types of investigations as well, they said.

Both groups have been falsely singled out, in different ways, by President Donald Trump and his campaign for being involved in voter fraud. Trump has repeatedly attempted to delegitimize ballots sent through the postal service, just as the country experiences increased voting by mail spurred by the coronavirus pandemic. He has also raised the specter that the ballots of military members, among whom he enjoys broad support, might be suppressed.

The DOJ and the White House did not immediately respond to requests for comment.

Experts who reviewed the revision said they were concerned it could be exploited to help the DOJ bolster Trump's campaign.

“It's unusual that they're carving out this exception," said Vanita Gupta, the former head of the DOJ Civil Rights Division under President Barack Obama. “It may be creating a predicate for the Justice Department to make inflated announcements about mail-in vote fraud and the like in the run-up to the election."

In a break from long-standing practice last month, a U.S. attorney in Pennsylvania publicly announced that the DOJ was investigating whether local elections officials illegally discarded nine mail-in military ballots. Attorney General William Barr personally briefed Trump on the case before it was publicly announced, The Washington Post reported. Trump later cited it as an example to support his claims of widespread mail-in voter fraud, a false assertion Barr has has helped amplify. It's not clear where the federal probe stands, but Pennsylvania's top elections official said early indications point to an error, not fraud.

The new policy carveout, Gupta said, could be designed to both justify the widely criticized Pennsylvania announcement and open the door for more such moves in the coming weeks.

Justin Levitt, a former deputy assistant attorney general in the DOJ's civil rights division, also expressed concern that the department could be encouraging prosecutors to make more public announcements about incomplete investigations, as they did in the Pennsylvania case.

“It alarms me that the DOJ would want to authorize more of the same in and around the election," he said. “It's incredibly painful for me to say, but given what we've seen recently, Americans shouldn't trust DOJ announcements right now."

The Friday email was sent to a group of dozens of prosecutors around the country known as district election officers. They monitor election procedures and take complaints on Election Day from the public about alleged crimes and serve as the federal points of contact for local election officials.

For decades, the work of federal prosecutors has been guided by a strict policy of non-interference in elections.

A 281-page document titled “Federal Prosecution of Election Offenses" is the handbook for district election officers. The latest edition, from 2017, warns against launching public investigations, without approval granted for extraordinary cases, into alleged fraud before an election is over.

Such a step, the handbook says, “runs the obvious risk of chilling legitimate voting and campaign activities. It also runs the significant risk of interjecting the investigation itself as an issue, both in the campaign and in the adjudication of any ensuing election contest."

One current DOJ official told ProPublica that prosecutors have historically been warned not to allow themselves to be dragged into candidate disputes. “That's what they drill into us: the policy of non-interference and never, ever, ever announce an investigation," the official said.

The Justice Department may have violated Attorney General Barr’s own policy memo

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

When the Justice Department recently publicized an ongoing investigation into potentially improperly discarded Trump ballots, critics accused it of violating long-standing agency policy against interfering in an election.

But the unusual decision to publicly detail the Pennsylvania case may also have run afoul of guidelines that Attorney General William Barr himself issued to federal prosecutors this year, according to a memo obtained by ProPublica.

In May, Barr wrote a directive to all Justice Department employees imploring them to be “particularly sensitive to safeguarding the Department's reputation for fairness, neutrality, and non-partisanship" when it comes to election-related crimes.

“Partisan politics," he wrote, “must play no role in the decisions of federal investigators or prosecutors regarding any investigations or criminal charges. Law enforcement officers and prosecutors may never select the timing of public statements (attributed or not), investigative steps, criminal charges, or any other action in any matter or case for the purpose of affecting any election, or for the purpose of giving an advantage or disadvantage to any candidate or political party."

Nevertheless, last month Barr's Justice Department issued a press release announcing an investigation into whether local elections officials illegally discarded nine mail-in military ballots in Pennsylvania. The announcement of an open investigation was highly unusual. Even more abnormal was that the press release specified that at least seven of those ballots were for President Donald Trump.

While the motivation of the Pennsylvania press release is unclear, Barr had personally briefed Trump on the matter before the announcement, The Washington Post subsequently reported, citing an anonymous source. The president raised it in a media interview and then DOJ's Pennsylvania office announced the investigation.

Then, the Trump campaign quickly jumped on the Pennsylvania case to bolster those claims.

“BREAKING: FBI finds military mail-in ballots discarded in Pennsylvania. 100% of them were cast for President Trump. Democrats are trying to steal the election," a campaign official tweeted.

Justin Levitt, a former deputy assistant attorney general in the DOJ's civil rights division, said the Pennsylvania press release was “flatly inconsistent" with Barr's memo “and shamefully so."

“There's absolutely no legitimate law enforcement reason I know of to mention who the ballots were cast for: They were either dealt with properly or not properly," he said. “And if there's no good reason, it leaves only the most likely bad reason: that the identity of the candidate was revealed for partisan political purposes."

Some experts did not agree . Samuel Buell, a former federal prosecutor who is now a professor at Duke Law School, said Barr could argue that “any public announcement about a ballot investigation complies with [the memo] because the language is so broad."

Barr, he said, could say the “purpose" of the Pennsylvania announcement was not to affect the outcome of the election or support a particular candidate, but some other non-prohibited motivation like “protecting the vote."

The Barr memo closelymirrored election-year guidance that previous attorneys general sent out under both the Obama and George W. Bush administrations. Barr himself said at his Senate confirmation hearings last year that the election policies were in place because the incumbent party has “their hands on the levers of the law enforcement apparatus of the country, and you do not want it used against the opposing political party."

Asked whether the Pennsylvania announcement ran afoul of the agency's election policies, Justice Department spokeswoman Kerri Kupec responded: “No." She declined to elaborate.

The U.S. attorney overseeing the case is David Freed, a former Republican nominee for Pennsylvania state attorney general who was nominated for his current role by Trump in 2017. In a publicly released letter, Freed said he was detailing initial findings despite an ongoing investigation “based on the limited amount of time before the general election and the vital public importance of these issues."

A second memo obtained by ProPublica, issued in August by Corey Amundson, chief of the DOJ's Public Integrity Section, was even more explicit.

In it, Amundson reiterated the Justice Department's long-standing policy in election fraud cases: “Overt criminal investigative measures should not ordinarily be taken in matters involving alleged fraud in the manner in which votes were cast or counted until the election in question has been concluded."

The memo was addressed to the Attorney General Advisory Committee, a group of U.S. attorneys that advise the attorney general.

The policy Amundson cites appears to make an exception for extraordinary cases. But it seems unlikely that would apply to the case in Pennsylvania. That involved only nine ballots, which appear to have been discarded by a sole contract employee. The motivation may have been an innocuous attempt to follow Pennsylvania rules barring ballots sent back without the proper envelope.

Current and former Justice Department officials told ProPublica that, even without the memos from top agency officials including Barr, the Pennsylvania press release violated long-standing department policy. They explained that prosecutors not only should not announce that they are investigating, but that they should be slow even to start an election-sensitive investigation during the campaign. Such an investigation is so sensitive, an opposing candidate could use it to smear his or her opponent.

“That's what they drill into us: the policy of non-interference and never, ever, ever announcing an investigation," one official said. “That's why the thing in Pennsylvania is bonkers, completely bonkers."

A spokeswoman for Freed declined to comment.

Barr has amplified Trump's attempt to discredit mail-in voting before, claiming falsely that there is widespread fraud.

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