A proposal has been drafted to change the law eliminating exchange traded funds’ chief tax advantage in the US by levying taxes on in-kind redemptions.

The bill, floated last week in the Senate by finance committee chair Ron Wyden, if passed, would no longer allow ETFs and other regulated investment companies to be exempt from recognising gains when distributing property in kind to a redeeming shareholder — something ETFs do routinely when managing their securities baskets.

The amendment to the law is one among a series of proposals that Democratic congressional leaders are pitching to help fund a $3.5bn budget package. The proposal would also eliminate the pass-through tax treatment applicable to master limited partnerships and other publicly traded partnerships, reaping a projected $172bn in total savings.