Topline

• Republicans continue groundwork for 2025 tax package

• Gensler under fire while justifying budget

• Privacy push remains stalled

• California accelerates AI regulation

Republicans continue groundwork for 2025 tax package

The Tax Cuts and Jobs Act (TCJA) of 2017 was the last major overhaul of the tax code, and it is set to expire in 2025, setting the stage for a partisan fight over another broad tax package. Revamping the tax code will trigger far-ranging policy debates to complicate an already difficult legislative process—no matter who is in charge. 

The process thus far: Republicans on both the House and Senate tax-writing committees have stood up internal working groups focused on key specific areas. Carta and our innovation coalition partners will engage holistically but with a specific focus on working groups including: Individual Taxes; Business Measures; New Economy, U.S. Innovation, and Global Competitiveness.

Democrats have not officially organized working groups, though the President’s Budget and the coming campaign platform will provide additional signal. Outside specific plans, the Senate Budget Committee convened a hearing focused on “Making Wall Street Pay Its Fair Share,” in which carried interest and capital gains tax came under fire. 

The issues: The debate will center on headline issues around the individual tax rate; corporate tax rate; long-term capital gains rate; global tax issues; how to invest money in families and the economy; and how we pay for it all. Importantly, in addition to those headline issues and even beyond the scope of the expiring TCJA provisions, there will be a debate about issues specifically meaningful and attached to the innovation economy. 

Carta is already engaging lawmakers on the policies critical to small businesses and innovation, including:

• Expanding the qualified small business stock (QSBS) eligibility to more businesses to spur job creation and incentivize long-term investment in startups and small businesses.

• Preserving tax treatment for long-term capital gains and carried interest to incentivize long-term investment in the private markets.

• Promoting corporate investment in innovation to restore full R&D expensing costs to boost innovation.

• Aligning taxation to the year that shares are sold to help employees realize the full value of their hard-earned equity, and extending the duration of the post-termination exercise period to better enable former employees to exercise their options and own the equity they earned following their departure from a company.

• Allowing e-file of section 83(b) elections to ease tax compliance burdens.

Why it matters: Taxes affect almost every aspect of commerce. This debate may not be concluded until the end of 2025, but it starts now. Every industry will be fighting for their tax policy priorities, and Congress will need to find ways to pay for it. This means provisions such as QSBS, carried interest, and more will come under fire. The private capital ecosystem needs to begin making its case to not only defend key provisions, but also to play offense, pushing for tax reform that drives more capital and talent to this sector, incentivises investment and innovation, and makes ownership possible and meaningful to more people. 

To get engaged, contact us at policy@carta.com.

Gensler defends ambitious agenda and crypto posture amid recent setbacks

SEC Chair Gary Gensler and CFTC Chair Rostin Behnam testified before the Senate this week on their respective agencies’ FY 2025 budget requests. Chair Gensler was undoubtedly the focal point, with much of the focus on the SEC’s aggressive rulemaking agenda and recent setbacks in court.

• PFA rules: In response to multiple questions on the private fund adviser rules struck down by the Fifth Circuit, Gensler defended the agency’s efforts to provide private fund investors with quarterly reports on fund fees and performance and information around side deals with other investors. While he believed the agency was acting within the law in issuing the rules, he respected the court’s interpretation. 

Takeaway: The SEC is still assessing the decision, its impact on other rulemaking initiatives, and whether or not to appeal. Gensler suggested the agency is likely to re-propose, or at least reopen for comment, proposed rules around predictive data analytics and safeguarding assets.

• Crypto: The turf war for crypto oversight between the SEC and CFTC was also on display. The crypto regulatory framework bill that recently passed the House would grant more regulatory responsibilities to the CFTC, and senators expressed concern as to whether the agency was up to the task. 

Takeaway: Chair Gensler—crypto’s biggest foe—suggested the SEC and its disclosure-based oversight regime was the more appropriate regulator. Gensler did suggest, however, that spot ether ETFs could begin trading this summer, though he did go so far to declare ether a commodity. 

Why it matters: As the SEC has pursued more contentious rules and enforcement postures, industry has  increasingly turned to sympathetic courts to strike them down—and they have been successful. But the impact of these judicial decisions can extend beyond the challenged actions. The PFA decision will have significant implications for SEC rulemaking authority, which will affect how the agency proceeds on several private fund-related proposals, as well as existing obligations. This makes it likely the SEC will appeal. Depending on election outcomes, the SEC could also be constrained by Congress through budget reductions and efforts to shift authorities to other agencies, notably in the crypto space.

Privacy push remains stalled

The relevant House Committee decided not to vote on the American Privacy Rights Act (APRA) which would replace the existing patchwork of state data privacy laws by establishing national data privacy rights and protections for Americans. Federal privacy legislation was always a long-shot, but this is likely the end of a viable shot this Congress.

• Discussions between party leadership and Chairwoman Cathy McMorris Rodgers have reportedly broken down, further dimming the draft’s prospects.

• The draft also continues to face staunch opposition; key congressional stakeholders, including Senate Commerce Committee Ranking Member Ted Cruz, and the tech community, as well as law enforcement, have raised concerns about the bill as well.

What’s next: Privacy legislation is often mentioned in a long list of issues that could, theoretically, attach to a larger legislative package destined to become law. But APRA is not progressing and several unresolved policy debates, including over its application to certain financial entities, indicate it’s not going anywhere this year. In the meantime, states will continue to enact their own data privacy laws.

California accelerates AI regulation

As the federal government grapples with how to regulate AI, states are continuing to step in and fill the gap. California has been leading the charge, introducing 30 new pieces of AI legislation in the last month. The legislation proposed in California covers a wide swath of concerns associated with the emerging technology, seeking to target intellectual property infringements, eliminate deep fakes, lessen AI-related discrimination in the housing and health care industries, and ensure that jobs will remain safe as AI adoption grows. 

These bills, if passed, will constitute the most restrictive AI regime in the US, and have spurred many in the Silicon Valley tech scene to lobby against their adoption, citing that the laws would severely stifle innovation. 

California’s legislature is set to vote on these laws by August 31.

Why it matters: While Senate Majority Leader Chuck Schumer remains positive that some AI legislation could move in Congress after the publication of his AI regulation road map, AI experts remain skeptical on the chances of federal AI regulations passing this year, and some in House leadership are now signaling they oppose legislating in the near-term. Similar to privacy legislation (another policy area where California took the lead in the absence of federal cohesion), we will likely see the AI regulatory landscape be composed of fragmented pieces of policy coming from different levels of government for quite some time as the federal government continues to debate the best way to regulate the emerging technology.

News to know

• PCAOB expands liability for auditors involved in firm violations (WSJ)

• Biden taps CFTC commissioner Goldsmith Romero to lead scandal-hit FDIC (Reuters)

• FTC Chair Lina Khan is pursuing the ‘mob bosses’ in Big Tech (TechCrunch)

• Tech industry groups push for trade dispute over Canada’s digital services tax (Politico)

• SEC charges founder of AI hiring startup Joonko with fraud (SEC)

• Elon Musk wins Tesla shareholder approval for $56 billion pay package (Reuters)

• The SEC reaches $4.5 billion deal with TerraForm over stablecoin scam (Fortune)

Upcoming events

• June 17 - The Washington Center for Equitable Growth event: The Promise of Equitable and Pro-Growth Tax Reform

• June 18 - Carta event: First Close: From Managing SPV’s to Launching a Fund

• June 21 - The Brookings Institution event: Supporting Black-owned businesses to drive economic development

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