The D.C. Council passed legislation last week aimed at bolstering the city’s burgeoning technology sector, but first stripped it of a provision that would have significantly reduced the amount of money District investors pay in capital gains taxes.
The decision dealt a blow to economic development officials in Mayor Vincent Gray’s administration who had proposed the tax changes to spur investment in D.C.-based companies and encourage wealthy entrepreneurs to live in the city.
The measure will now be considered by a commission established to evaluate all of the city’s taxes.
As passed, the Technology Sector Enhancement Act of 2012 will still provide high-tech companies based in the District with a corporate income tax exemption of up to $15 million for five years after they turn a profit.
The law must now pass a second, more ceremonial vote and be signed by Gray (D).
Under the eliminated capital gains provision, investors who live in the District and pump money into District-based technology firms would have paid a 3 percent tax when they cash out on those investments. For most, the current rate is just under 9 percent.
Officials in the Deputy Mayor’s Office for Planning and Economic Development said the measure would have encouraged wealthy residents to become angel investors who put money into local tech firms, rather than other business ventures.
What’s more, the legislation would help the District hang on to entrepreneurs and employees of start-ups who might otherwise move to Maryland or Virginia when their firm is about to be acquired or go public.
“That time is when many of those early stage employees will decide whether to leave the city because they’re going to have a huge tax penalty if they stay here,” said David Zipper, director of business development and strategy.
Critics of the capital gains tax reduction argue it would do little to incentivize new investment in the city’s technology companies and amounts to a tax break for a narrow slice of the District’s wealthiest residents.
The D.C. Fiscal Policy Institute advocated against the capital gains reduction, arguing that investors base their decisions on a company’s prospects rather than the tax rate on a payout that they may never see.
“You want a company that is going to win, so you’re going to make choices based on the strength of the company and not the tax rate,” said Ed Lazere, executive director of the D.C. Fiscal Policy Institute.
This is the second bill related to tech taxes. Earlier this summer, the council granted a $32.5 million tax break to LivingSocial as part of deal that requires the daily deal purveyor to keep its headquarters in the District and hire city residents.