Update: DC Council delays high-tech investor tax break vote until September

Yesterday, the DC Council decided to delay a first vote on a bill that would create a special low tax rate for investors in high tech companies. DCFPI wants to thank The District’s Dime readers who emailed and called Chairman Phil Mendelson and his colleagues to say that you disagree with this provision. The “Technology Sector Enhancement Act of 2012″ will now come before the Council in September, when our city’s legislative body returns from summer recess. DCFPI will continue to urge the Council to strike the three percent tax rate from the bill.

As it is currently written, the bill would create a special tax rate for investors in qualified high technology companies. The three percent capital gains rate would be DC’s lowest income tax rate’even lower than the four percent income tax rate paid by residents who earn the minimum wage. The rate is not only the lowest in DC but far lower than the income tax rates in Virginia and Maryland.

DCFPI supports policies to grow the tech sector, but this provision does not accomplish that. Studies show that cutting the capital gains tax does not incentivize investment. As well, the three percent rate would apply to current investments and would provide big tax savings to tech investors who might be looking to cash out soon. This might be true for investors in LivingSocial, which got final approval from the Council yesterday on $32.5 million in income and property tax breaks. Press reports say that the company might have an initial public offering of stock as early as next year. 

A tax break for these investors will be an additional boost on top of the millions they will gain, but it will be the District that will lose a lot in terms of resources for schools, libraries, and all the other services provided by taxpayer dollars. A document circulated by the Gray administration claimed that “a number of high-value tech employee stockholders” are considering “relocating to Virginia” to avoid District taxes.

DCFPI hopes that the Council’as well as these individuals’will follow the Buffett Rule, not break it. Billionaire Warren Buffett’an Alice Deal and Wilson High School graduate’has said that he thinks it is wrong that he pays a lower tax rate than his secretary. DC’s Chief Financial Officer was not able to estimate the financial impact on the District but said it could be substantial.

Some have referred to this as the “angel investor” bill, but it’s important to remember that the goal of these investors is not divine–it is to make money. So-called angel investors tend to be high-income and invest for a high-return. But this bill isn’t just limited to individuals, it also applies to venture capital firms. The mayor and council should look for good ways to build DC’s tech sector, but slashing the capital gains tax isn’t the right method.