Donald Trump is not the only one who has managed to whittle down his tax bill during his presidency — the world’s largest private equity firm, the Blackstone Group, reported that its effective income tax rate went below zero last year even as it raked in billions in profits, according to corporate documents reviewed by the Daily Poster.
Now, Blackstone billionaire CEO Stephen Schwarzman has become one of the GOP’s largest donors, as one study shows his net worth has increased by 27 percent during the coronavirus pandemic. In all, Schwarzman has funneled nearly $25 million into campaigns to help Republicans retain control of the Senate and to help Trump win reelection.
That money is a Wall Street insurance policy: If Republicans retain control of the presidency or the Senate, the GOP will almost certainly maintain the tax cuts that last year prompted Blackstone to convert its firm from a partnership into a traditional C corporation, which is more directly subjected to the newly reduced federal corporate income tax. The financial maneuver coincided with Blackstone reporting a sub-zero tax rate in 2019.
In contrast to Republicans, former vice president Joe Biden has pledged to raise corporate tax rates in a way that could require Schwarzman’s firm to pony up more — a promise Biden reiterated at Tuesday night’s debate.
“Schwarzman is trying to make sure that the Republicans at least hold onto the Senate in order to preserve the lower corporate tax rates that Blackstone is now relying on,” said University of California Irvine tax law professor Victor Fleischer, a former Democratic tax counsel for the Senate Finance Committee. “If the Democrats get a clean sweep and follow through on their promise to increase the corporate tax rate, that would create pain for firms like Blackstone that have locked themselves into paying those taxes.”
Blackstone Gets Big Benefits During Trump’s Presidency
Schwarzman is a longtime GOP donor and has been one of Trump’s top outside advisers. During the Trump presidency, Blackstone has seen its policy agenda advance.
The administration has eased rules restricting bank investments in private equity and the Labor Department has pushed forward a rule that could allow the firm to make big fees off workers’ 401(k) plans.
The firm also benefited from the death of “surprise billing” legislation — Blackstone owns the hospital staffing conglomerate TeamHealth, which helped bankroll a $54 million advertising campaign against a bipartisan measure that would have ended the costly practice.
On the tax front, Schwarzman was a Wall Street cheerleader for the 2017 Republican tax law, which slashed the corporate tax rate from 35 percent to 21 percent, and also cut other real estate taxes. Since that bill passed, Blackstone’s effective federal income tax rate has steadily decreased.
According to company documents, Blackstone’s effective income tax rate went from 18 percent in 2017, to 7.1 percent in 2018. By 2019, the company reported a negative 1.3 percent rate — even as it saw almost $3.9 billion in net income on $7.3 billion in revenue. That same year the company converted from a partnership into a corporation, allowing it to take advantage of the lower corporate tax rate in Trump’s tax bill.
The company’s filings with the Securities and Exchange Commission say that “Blackstone has calculated the estimated effect of the change in tax status to be a tax benefit of approximately $394.8 million, net of a valuation allowance of approximately $648.2 million.”
“They reaped the benefit going in and we don’t understand exactly what that benefit was, but it gave them a negative effective tax rate,” said Indiana University accounting professor Shawn Novak, who served on the Republican staff of the Senate Finance Committee. “That is a pretty big deal because if you’re reporting a negative effective tax rate, you’re saying that the tax system increased your profitability for the period, which is kind of a perverse result.”
For its part, the company asserts that its negative tax rate in 2019 is only a fleeting one-time harvest.
“This reflects a temporary impact of the conversion,” said Blackstone spokesperson Matthew Anderson. “As we’ve stated publicly, we expect to pay a higher tax rate as a corporation than a partnership.”
However, that may not be an apples-to-apples comparison.
In Blackstone’s previous form as a partnership, profits from management fees and other fees were directed to a Delaware subsidiary that paid some corporate tax at a 35 percent rate prior to the 2017 rate change, according to Fleischer. Other earnings taken out of its investors’ gains — known as carried interest — were passed through directly to the company’s partners, and much of it was taxed at the 20 percent capital gains rate instead of higher individual tax rates.
Under the company’s new structure, all corporate profits will be subjected to the 21 percent corporate tax rates.
Blackstone’s Conversion Is Predicated on Preserving GOP Tax Cuts
Blackstone’s stake in the election is tied to its decision — like many other private equity giants — to convert from a partnership structure to a corporation after Trump’s tax cuts passed.
Those conversions allow financial firms to attract new capital from institutional investors such as mutual funds that often avoid moving money into publicly traded partnerships. However, giants like Blackstone were previously deterred from changing over to a corporate structure because doing so would subject them to the old 35 percent federal corporate income tax. The lower corporate tax rates enacted by Trump made converting to a C corporation more lucrative.
“Our conversion to a corporation is an exciting next step for Blackstone, which we believe will make it much easier for both domestic and international investors to own our stock,” Schwarzman said at the time. “We’re pleased that many more shareholders can now join us as we’re poised for continued growth and innovation in the years ahead.”
Since the conversion, Blackstone’s stock has risen by 10 percent.
However, because the company is now subject to the federal corporate income tax — and because the company cannot easily revert back to a partnership — Blackstone’s long-term profits are now far more threatened by Democrats’ proposals to raise the corporate tax rate.
“I’m going to make the corporate rate 28 percent, it shouldn’t be 21 percent,” Biden said during Tuesday night’s presidential debate.
If he wins the election and Democrats follow through on that promise, the tax increase could eat into potential profits that Blackstone hoped for when the firm decided to convert from a partnership into a corporation.
Schwarzman’s Incentive to Defeat Democrats
That’s where Schwarzman’s campaign donations come in as an insurance policy.
The $24.5 million he has pumped into Republicans’ Senate and presidential campaigns could help the GOP retain control of the Senate and the White House. Either or both of those outcomes would likely prevent Democrats from enacting the Biden-backed corporate tax increases that could complicate Blackstone’s finances under its new corporate structure.
Schwarzman seems most focused on the Senate: $20 million of his donations have flowed into the Senate Leadership Fund, a super PAC that supports GOP Senate candidates; and $1 million to the 1820 PAC, an outside group backing Sen. Susan Collins, R-Maine. Schwarzman also donated $2.5 million to the Congressional Leadership Fund, which elects Republicans to the House.
In the presidential race, Schwarzman has contributed $3 million this cycle to America First Action, a pro-Trump super PAC, and $355,000 to a joint fundraising committee that splits donations between the Trump campaign and the Republican National Committee.
Schwarzman is also bundling cash for Trump’s campaign. Bloomberg News recently reported that “the private equity mogul single-handedly accounts for the vast bulk of the reported contributions toward Trump’s re-election effort over the past 18 months from people associated with the 31 banks and investment firms that dominate the U.S. financial industry.”
Executives at other private equity giants that converted from partnerships to corporations have delivered significant resources to key Senate Republicans who would play a pivotal role in stopping any Democratic measure to raise the corporate tax rate.
In all, donors from KKR, Apollo Global Management, the Carlyle Group and Blackstone — each of which converted — have collectively delivered $500,000 to the campaigns of Republican Senate Majority Leader Mitch McConnell and GOP Sen. John Cornyn, a senior member of the upper chamber’s tax-writing committee.
KKR, which completed its conversion in mid-2018, reported a negative 8.6 percent effective income tax rate that year, according to a company filing. In 2019, its effective tax rate went up to 10.2 percent — which is less than half the official 21 percent corporate rate.
Wall Street Hedges Bets With Cash to Democrats
While Schwarzman has showered the GOP with cash, some Blackstone executives have given big dollars to Democrats who — if they win the election — would be in a position to decide on any legislation to raise corporate tax rates.
Blackstone president Jon Gray has donated $2 million this year to the Senate Majority PAC, a party-aligned super PAC backing Democratic senatorial candidates. Gray and six other Blackstone executives have each contributed $50,000 to Unite the Country, an outside group that supports Biden.
The firm has also hired former staffers to prominent Democrats, including Alex Katz, a former adviser to Senate Minority Leader Chuck Schumer and Senate Majority PAC, and Jennifer Friedman, who served as deputy press secretary in the Obama White House.
“Trump is not the only one benefiting from a broken tax structure. Corporations, like Blackstone, also pay nothing in taxes,” said Jonathan Westin, the executive director at New York Communities for Change. “If Democrats take back the Senate, their number one priority needs to be reversing Trump’s tax cuts for corporations, so that families struggling during the pandemic can finally get the relief they need.”