Funds hard to come by on proposed tech tax break
By Bill Flook, Washington Business Journal
Rep. Chris Van Hollen, D-Md., and four other members of Congress are proposing to carve out a new tax break for investing in government-funded technology startups — the latest in a series of local, state and federal incentives meant to steer private money toward technology and biotechnology ventures.
Van Hollen’s bill, introduced July 15, would provide a 25 percent credit for an equity investment in a company that has already qualified for a federal research and development grant program for small businesses. Under the legislation, the credit’s value would be limited to half the size of the Small Business Innovation Research award, and capped nationally at $500 million.
“Clearly there is a big appetite for this around the country,” Van Hollen said. “I think it’s going to be very well received because it’s targeted at areas that need a boost right now and can add significant value.”
But the bill — like much of the new legislation that spends federal tax dollars — could run afoul of a growing aversion to Congress for new spending that’s not balanced by cuts. That fear of adding to the deficit has played out in several high-profile struggles on the Hill, most recently over extending the stimulus package’s jobless benefits. And finding those needed reductions or revenue is tougher after the passage of the health reform bill, which gobbled up what were considered to be most readily available offsets.
“We will identify an offset,” Van Hollen said.
Reps. Dutch Ruppersberger, D-Md., Allyson Schwartz, D-Pa., Betty McCollum, D-Minn., and Jared Polis, D-Colo., joined Van Hollen in introducing the bill — dubbed the Innovative Technologies Investment Incentive Act. It is pending in the House Ways and Means Committee, on which Van Hollen sits.
Linking the tax break to the SBIR award is smart, said Don Rainey, a general partner with Vienna-based venture capital firm Grotech Ventures, “because it takes all those federal dollars that will be spent anyway, and causes more private dollars to complement that investment.”
“Startups tend to create more startups, particularly successful ones,” he said. “People go into a startup, see its success, learn what you need to do and they start companies.”
The legislation is modeled partly off Maryland’s highly sought-after biotech tax credit, which state lawmakers increased to $8 million this year. Montgomery County also put in place an analogous local tax credit based on the state program, and — like Van Hollen — remains unsure of how to pay for it. Gov. Martin O’Malley wants to raise $100 million in venture capital funds for biotechnology by offering deferred tax credits to insurance companies.
In Virginia, lawmakers this year passed a bundle of tech-friendly tax breaks. The largest, a new long-term capital gains tax exclusion, will mean that investors who back tech startups within the next three years will be exempt from paying state capital gains once that company is sold or goes public.
The venture capital world is slogging through a time of uncertainty, with fewer dollars flowing into venture capital funds, but with more, and bigger, deals taking place.
Nationally, venture capitalists invested $6.5 billion in the second quarter of 2010, up from $4.2 billion in the same period the year before, according to a quarterly report from PricewaterhouseCoopers LLP. Clean tech, biotech, information technology and software investments all showed signs of recovery. Still, venture capital funds raised a dismal $1.9 billion in the second quarter, the lowest level since the third quarter of 2003.
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