A bill before the DC Council on July 10th ‘ the Technology Sector Enhancement Act ‘ would allow investors in DC tech companies to pay just three 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 four 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:

Why Should DC Create Its Own “Warren Buffett Problem?”  The billionaire Warren Buffett’a Wilson High School graduate’has noted that he pays a lower tax rate than his secretary due to low federal tax rates for investment income. He supports raising taxes on investment income to address this inequity. DC’s legislation would create a local “Warren Buffett problem,” by taxing high-income residents with tech investment income at a lower rate than working DC residents. Instead, the Council should follow the “Buffett Rule” by asking our highest earners to contribute fairly. The average income of the top five percent of DC residents is higher than in any major U.S. city, strong evidence that the District does not have a problem attracting high-income residents and does not need to reduce tax rates to retain residents.

DC Already Provides Substantial Tax Incentives to High-Tech Companies. Why Should We Also Subsidize High-Tech Executives?  When asked why the tax cut would not be limited to new investments, the Gray Administration notes that there are high-tech company owners who stand to make substantial gains on prior investments and have said they will leave DC without a tax break. It is very likely that these company owners already have benefited from District tax subsidies, since the city offers multiple tax breaks to tech companies and just approved $32.5 million in tax breaks for LivingSocial. Providing deep tax cuts for investment gains, on top of breaks already received by their companies, would mean unusually large subsidies to tech companies and owners.

Why Should Venture Capital Companies Get A Steep Tax Cut? It does not make sense to cut taxes for companies that are in the business of investing in other companies and are likely to be making such investments, anyway.

Is Now a Good Time to Risk a Deep Loss of DC Revenues? DC’s Chief Financial Officer notes that the impact of the proposed three percent investment tax rate could be “substantial” but cannot be predicted reliably.  The tax cut could affect DC revenues negatively at a time of global economic shakiness and when the District has no revenues to fund critical items on its budget “wish list.”