One reason behind that sharp discount is that Rauner took advantage of a strategy that yielded big tax savings on his share of investment fees paid to his private equity firm, GTCR. That strategy is allowed under tax rules but has come under
An analysis of the limited records Rauner has released, conducted by the Tribune in consultation with tax experts, gives the fullest picture yet of the steps he took to trim his tax bill. In ways both big and small, the Republican businessman's financial profile is one driven by tax-reducing strategies often out of reach for those of more modest means:
--Rauner's campaign is built around his resounding success at the helm of GTCR, through which he earned millions of dollars a year. But a major portion of that money was reported to the
--For three years, Rauner reported little regular business income, the tax category that includes partnership earnings and is subject to a top tax rate of 35 percent. Instead he claimed losses of
--Complicated tax rules related to those business income losses freed Rauner from paying any
--In 2012, Rauner claimed an additional
Rauner's combined federal tax bill was
Likely the wealthiest office seeker in
Experts say the limited nature of his tax disclosure makes it difficult to draw a complete financial picture of Rauner, and the candidate himself has been reluctant to fill in many of the gaps.
In a Tribune interview focused on his taxes, Rauner said his returns "very carefully" adhered to the tax code and that he paid everything owed. At the same time, he said he could not recall some details surrounding losses he claimed and deductions he took.
"My income is based upon a whole lot of things. It's capital gains through carried interest. It's through management fees I get across all the funds," said Rauner, who characterized his earnings as "lumpy" because they fluctuated widely from year to year.
"I've been a very large owner in every GTCR fund over 32 years. I also have other personal investments, some of which generate ordinary income of various types, some of which generate capital gains, some of which generate interest income," Rauner said. "Breaking apart all that detail is hard to do."
Central to Rauner's campaign is his financial success, which he argues is proof of the kind of leadership savvy needed to turn around a financially ailing state. But that approach comes against the backdrop of a broad national argument over the meaning of an ever-widening gap between incomes of the wealthy that keep growing and those of the middle class that have been stagnant for years.
That debate led to political headaches in 2012 for former
And there are significant parallels between Romney and Rauner, both of whom made fortunes at the helm of private equity firms. During his campaign, Romney released two years worth of voluminous tax returns that provided considerable fodder for critics who argued that he took ample advantage of tax code loopholes favoring the wealthy.
While Romney released more than 700 pages of returns and schedules, Rauner's financial disclosures have been much less extensive.
The campaign of the
In 2012, the intense focus on Romney's wealth and taxes spilled over into the business practices of his old firm,
"We don't like what we see in all cases," the
Experts say most large private equity firms have employed the strategy, some more aggressively than others.
Private equity firms make money for their partners in a variety of ways. Most, including GTCR, take a 20 percent cut of earnings from the large investment pools they oversee -- revenue referred to as "carried interest" but treated as preferentially taxed capital gains. To encourage investment, federal tax law has long conferred special low tax rates on such investment profits.
Another lucrative source of equity firm revenue is management fees, essentially charges for the service of overseeing investments. Most equity firms levy a 2 percent annual charge on the assets they manage for clients, but Rauner has said the GTCR charge is 1.5 percent.
Service fees charged by most professionals, be they money managers or plumbers, are typically considered regular income and subject to taxation at the top of whatever tax bracket the individual qualifies for under the federal progressive tax system, tax experts said. In Rauner's case, that was 35 percent through 2012.
At its core, the fee waiver strategy is an accounting maneuver that blurs the line between management fees charged by equity firms like GTCR to manage funds for investors and profits generated by the firms' investments in the funds they manage.
In short, equity firms technically waive collecting on millions of dollars of management fees they are owed, but that hardly means they forgo the value of those fees. Instead, that gets reflected as a stake in the very investments they manage.
When the investment fund turns a profit, often within months, the equity firm receives the cash value of the waived fees and distributes that among its partners.
All that maneuvering might sound esoteric, but it carries profound tax consequences. Tax rates changed in 2013, but before that it meant the difference between paying a 35 percent rate on fee income or a 15 percent rate on investment income.
Put another way, for every
"It's a technique that is entirely tax-driven," said
With that, the fees became profit centers in their own right for equity firms, which quickly began devising creative ways to minimize the tax consequences, Krob said.
For years, Rauner said, GTCR had relied on a traditional fee structure as it organized a series of investment funds. Clients paid management fees to GTCR, which then distributed the money among Rauner and his partners, who then were taxed on that income at top rates, he said.
That changed in 2009, he recalled, when the firm was organizing a new investment pool, known by Roman numeral as Fund X, that grew to more than
This time the partners opted to forgo taking fees in cash and instead use fee waivers, Rauner recalled, adding that he was hesitant about the strategy but acquiesced to the wishes of other partners. For one thing, he said, the approach required more paperwork.
Rauner said tax consequences were only one of many considerations weighed. "The tax element is one of the factors," he said. "It's all about trading off less certainty for more upside. If you really, really hit it out of the park you can make more money from carried interest just from raw performance. But there's less certainty to it."
Critics, however, contend the strategy involves little risk because equity firms like GTCR, as managers of the investment pools, can be paid the cash value of fees as soon as there is a profit.
"It's a total tax game. There is no nontax reason for it," said
Polsky said equity firms are at the controls of the investment funds they manage. He said the only scenario that could prevent them from recouping waived fee revenue is if a fund lost money from start to finish without a single profitable quarter.
"If hell freezes over, they might not get their 2 percent, but that's not going to happen," Polsky said.
"By taking their compensation in this way, they are avoiding ordinary income tax rates, which were 35 percent at the time, plus
For most wage earners, those so-called payroll taxes are deducted directly from paychecks. But Rauner said he hasn't taken a regular salary since the early 1980s.
For business executives like Rauner, the
Rauner's tax returns report a payment of
That is not to say that Rauner did not report making millions of dollars off GTCR and other enterprises, but his tax returns spread it among a variety of income categories and it is impossible to determine why he declared such big losses in one of those without the supporting tax documents Rauner declines to release.
Asked to explain those losses, Rauner said he couldn't recall details but speculated that a portion was likely connected with large ranching operations he owns in
Despite owing no payroll taxes for two years, Rauner at the same time did remit what are known as household employment taxes, his returns show. Those are tax withholdings deducted from the pay of two personal assistants to cover their
Rauner said he would not be releasing additional tax documents beyond the 1040s he had made public. The experts consulted by the Tribune said such broader disclosure would almost certainly shed light on the business losses he claimed as well as other strategies used to minimize Rauner's tax bill.
"Obviously, in virtually every year the vast bulk of my income is capital gains, because that's where my assets go, to purchase equities, ownership in both business and real estate," Rauner said.
He said his returns show large variations from year to year in interest income, self-employment income and other categories.
"Some of those categories of income are susceptible or part of the
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