Senate Passive Income Provision Could Undermine U.S. Market Liquidity

Six major investment associations have petitioned Senate leaders to exempt passive income from the latest tax and spending package, warning that a levy targeting foreign investors could unsettle U.S. markets. In a letter to Senators Thune and Crapo, the Managed Funds Association, American Investment Council, Investment Company Institute, Loan Syndications and Trading Association, National Venture Capital Association and Real Estate Roundtable cautioned that the proposed tax on rents, dividends and other passive returns risks spooking global capital flows.

The levy would impose up to a 20% progressive tax on foreign holders of U.S. passive income if their home countries are deemed to enforce “unfair foreign taxes.” The groups argue this retroactive burden, slated to take effect in 2027 under the Senate bill, could trigger pre-emptive sell-offs and depress valuations across public and private debt and equity markets.

• Progressive tax of up to 20% on foreign investors’ passive income threatens U.S. asset demand.
• Exemption proposed for income types including dividends, rents and investment returns.
• Senate version delays implementation to 2027, one year after the House bill.

• Six associations representing funds, VC and real estate sectors co-signed the letter.
• Risk of accelerated portfolio sell-offs could erode U.S. asset values.
• Multinational firms warn of potential operational shutdowns in U.S. markets.

• Senators may amend or remove the passive income provision before final passage.
• Stakeholders await reconciliation of House and Senate tax bill versions.
• Market participants monitor political negotiations for implementation timeline shifts.

• Strong industry pushback from major investment associations may lead Senate leaders to amend or remove the proposed passive income tax, preserving the attractiveness of U.S. markets for foreign investors.
• The Senate version of the bill already delays implementation until 2027, providing a longer runway for negotiations, exemptions, or alternative solutions that could mitigate market disruption.
• If the passive income tax is ultimately excluded or softened, the risk of pre-emptive sell-offs and depressed asset valuations would be reduced, supporting market stability and investor confidence.
• Bipartisan negotiations and stakeholder engagement are ongoing, increasing the likelihood of a balanced outcome that addresses both federal revenue needs and the imperative to maintain U.S. financial competitiveness.
• Even if the tax is enacted, the extended timeline and potential carve-outs could allow foreign investors to adjust gradually, minimizing negative impacts on capital flows and liquidity.
• Continued advocacy from influential industry groups and multinational firms may sway policymakers to reconsider the full scope and impact of the proposed levy.

• The proposed 20% progressive tax on foreign investors’ passive income risks spooking global capital flows, potentially triggering pre-emptive sell-offs and depressing valuations across U.S. public and private debt and equity markets.
• Even the threat of a passive income tax could reduce foreign appetite for U.S. investments, raising borrowing costs and weighing on market liquidity.
• Multinational firms have warned they may shut down U.S. operations in response to the new tax, further eroding market confidence and economic activity.
• Analysts and Wall Street strategists have already flagged the proposal as a deterrent to capital inflows, which could weaken the dollar and increase volatility in U.S. asset prices.
• Despite lobbying efforts, the Senate has so far retained the provision targeting foreign investors, and its ultimate fate remains uncertain as negotiations continue.
• If enacted, the tax could significantly disrupt U.S. markets, especially if it is applied retroactively or with limited exemptions, leading to long-term damage to the country’s financial competitiveness.

Analysts note that even talk of a passive income tax could curb foreign appetite for U.S. investments, potentially raising borrowing costs and weighing on market liquidity. Many Wall Street strategists have already flagged the proposal as a deterrent to capital inflows.

As Congress finalizes the reconciled tax and spending bill, the fate of the passive income exemption will hinge on bipartisan negotiations and the balancing of federal revenue needs against the imperative to maintain U.S. financial competitiveness.