House tax bill bolsters innovation ecosystem…in round one

Topline

• House tax committee advances tax bill that favors innovation ecosystem

• Carta Policy hits Chicago, New York

• U.S.-China trade conflict de-escalates

• Quick hits

Big, beautiful bill clears first hurdle with wins for innovation ecosystem

The House tax-writing committee advanced their tax reform package this week. The $3.8 trillion bill permanently extends most of the TCJA tax cuts set to expire at the end of the year, and includes new provisions to advance most of President Trump’s priorities like exempting tips and overtime wages from taxation. Importantly, the Innovator Alliance was successful in protecting carried interest and QSBS and reinstating full expensing for R&D expenses, albeit on a temporary basis.

What’s in the bill: On the whole, the innovation ecosystem made out pretty well. Here’s a deeper dive on provisions that matter to the ecosystem:

• Preserves tax treatment on carried interest. Despite the President’s support for ending the favored tax treatment, carried interest will continue to be taxed at capital gains rate if held for three years. Republicans also unanimously blocked an amendment at markup that would have taxed carry at ordinary income rates. Nothing is final until the bill is signed into law, but this is positive signal and fund managers can breathe a sigh of relief.

• Restores immediate R&D expensing and bonus depreciation, but it's only temporary. The provisions are retroactive to the beginning of 2025 and will sunset in 2029. Expect a push in the Senate to make these changes permanent.

• Maintains existing treatment of qualified small business stock (QSBS). We feel pretty confident QSBS is safe and will now focus efforts to expand the provision—but that’s not for this bill. 

• Increases 199A small business deduction from 20% to 23% and extends it to business development corporations (BDCs).

But it wasn’t good news for every sector. The bill substantially rolled back energy tax credits and imposes higher taxes on foundations and endowments, which invest heavily in alternative assets. However, most of the energy credits would not start to phase out until 2029.

Outlook: Advancing through the committee process is only round one. What comes next will be much harder, and changes will almost certainly be necessary for the package to pass the House. Members from blue-state delegations like New York have threatened to oppose the bill unless SALT caps are substantially expanded; moderate Republicans have called for reinstating some of the clean energy tax credits; while the House Freedom Caucus has criticized the package for not including enough spending cuts. Speaker Johnson can only lose three Republican votes, so any opposition could derail the entire package. 

House leadership intends to hold a final vote on the package before Memorial Day, but there are a few more hurdles that remain before we get there:  it must pass the House Budget and House Rules Committees. It failed the first test today (Friday) when conservative hardliners on the Budget Committee joined Democrats to vote it down. The Senate has also signaled it would not pass the House package as is. 

Bottom line, there will be changes. And any adjustments both open the window to erode our priorities by using them as pay-fors and create opportunities to expand.  Things are looking pretty good, but engagement remains critical to ensure our priorities remain in the package. There is still a long way to go. 

Carta Policy hits Chicago, New York

This week, the Carta Policy team traveled to Chicago for the SuperReturn conference to discuss the policy outlook for private capital, covering topics from trade to tariffs to investor access and what this means for fund operations. 

Then it was off to the Big Apple for RAISE Global's LP-only summit, where we shared insights around the macro policy environment and sector-specific trends and what this means for private capital investors. 

And we learned a lot too. 

U.S. and China strike a pause

The U.S. and China agreed to a 90-day pause on “reciprocal” tariffs while they continue “rebalancing” their trade relationship. The temporary deal was brokered by Treasury Secretary Scott Bessent, U.S. Trade Representative Jamieson Greer and Chinese Vice Premier He Lifeng in Geneva, Switzerland. The contours of the temporary pause include:  

• A 30% tariff on most goods (10% baseline tariff + 20% fentanyl tariff). This will last from May 14, 2025 through August 12, 2025, at which point the rate increases.

• Exempting goods subject to reshoring tariffs under Section 232 of the Trade Expansion Act of 1962 (25%)  from the 10% baseline tariff but not the 20% fentanyl tariff, effectively making these goods subject to a 45% tariff.

• Applying other pre-existing tariffs, namely those under Section 301 of the Trade Act of 1974, on top of the 30% or 45% rates. 

In return, China will match the reciprocal tariff pause by lowering its tariff on US goods to 10% 

Looking ahead: Treasury Secretary Bessent predicted a three-step process for tariff negotiations: (1) de-escalation; (2) uphold the U.S.-China Phase One Deal and (3) expand reciprocal trade. We are in the “de-escalation” phase, and the next inflection point will likely hinge on lowering the 20% fentanyl tariff. 

Quick hits

• HFSC to markup capital formation bills next week. The committee is expected to consider a number of measures that would expand accredited investor on-ramps, increase retail access to private funds, and make it easier for companies to go public. We’ll cover in more detail next week.

• House Republicans include a 10-year ban on states regulating AI as part of big, beautiful bill. This consequential provision, if enacted, would be a huge win for the AI industry, which is facing the threat of an increasing patchwork of state legislation. It’s a long shot to get across the finish line as part of reconciliation, but it will remain a priority.

• Crypto corner

  • Atkins outlines areas of focus on crypto. This includes creating clear guidelines and exploring the use of exemptions and safe harbors around issuance; providing more optionality with respect to custody, including repealing prior broker-dealer crypto custody guidance; and modernizing the ATS regulatory regime to better accommodate crypto asset trading.

  • Revised stablecoin bill text circulated with hopes of passage next week. The updated language aims to address concerns from Democrats, including strengthened consumer protections and AML rules, limitations on Big Tech, and language to ensure special government employees were bound by the ethics laws. Senate Majority Leader John Thune filed cloture, which means the bill could be considered as soon as Monday.

CFTC commissioner to lead crypto org; two more to depart soon. CFTC Commissioner Summer Mersinger is departing the agency at the end of the month to join the Blockchain Association as its new CEO. Commissioners Christy and Acting Chair Caroline Pham have also announced their intentions to leave the agency soon, which would only leave two commissioners after Brian Quintenz is confirmed.

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