Chairman Mendelson: Let’s Get the Tax Commission Recommendation Before Lowering Taxes for High Tech Investors
At its last legislative session, the D.C. Council made a smart move by delaying a vote on a bill that would create a new tax rate of 3 percent for investors who sell their shares in high-tech companies. In fact, the Council should delay a vote on the bill not just until September when the Council returns from recess, but until the District’s Tax Revision Commission has completed its assessment and recommendations on our tax system. DCFPI urges Council Chairman Mendelson to let the body complete its comprehensive review of our tax policy before making additional changes.
Bill 19-747, the “Technology Sector Enhancement Act” would allow investors in DC tech companies to pay just 3 percent in income tax when they sell their stake in these companies for profit. This special new tax rate for tech investors would be lower than the income tax rates paid by all other DC residents, which start at 4 percent. The rate would be just one-third of the top rate that Maryland residents pay, and about one-half the top income tax rate Virginia residents pay. The rate cut would apply not only to individuals, but to venture capital companies as well.
The Gray administration supports this proposed steep break from DC’s top tax rate of 8.95 percent because it claims in a document circulated to Council members that “high-value tech employee stock-holders” are considering “relocating to Virginia to shelter themselves” from paying taxes to the District. The bill is aimed at helping a special class of DC residents—wealthy investors and tech executives—to pay very low taxes on potentially substantial income gains. Such a dramatic tax cut raises several concerns:
- There is no evidence that cutting capital gains tax rates is effective in encouraging investment or in growing the economy. Instead, Mayor Gray and the District Council should work towards proven techniques for growing the tech sector.
- This tax cut applies to past investments. If the legislation were really geared towards future investments, it would not allow people who already own parts of tech companies to take advantage of the new tax rate. These individuals have already invested in companies, meaning that they thought it would profitable without a tax cut.
- The legislation does not exclude venture capital companies. Venture capital companies are in the business of investing in other companies. We don’t need to give them a tax cut just for doing their job.
- The District provides other tax incentives aimed towards tech sector growth. In fact, the District already has laws offering benefits to high tech companies. For example, the District just gave Living Social a $32.5 million tax abatement.
- The District cannot afford to risk deep loss in revenues. Revenue projections have been flat, meaning that items on the budget “wishlist” will likely not be funded in the coming year. The loss in revenue from this tax cut could potentially decrease revenue even further.
Last year, DCFPI conducted a poll that showed that a majority of residents—including high-income residents—wanted our government to invest in services and programs rather than cut taxes. Business owners know that smart spending in capital projects, such as schools, public transit, and public spaces like libraries and recreation centers, as well as in human capital, such as teachers and job training, bring a good return on investment.
The health of the city is a collective endeavor, in which all should contribute. The Council should delay a vote on this bill until the Tax Revision Commission recommends what that contribution should be for high-tech investors.