D.C. Council punts on capital gains tax break for tech investors

The D.C. Council refused on Wednesday to advance a major tax break for tech investors and entrepreneurs backed by Mayor Vincent Gray, sending the proposal for further study in a tax review commission.

Council members passed two less disputed provisions of the legislation into second reading, but declined for the second time in two months to vote on the capital gains exemption. Under the current tax structure, investors and other shareholders in tech startups would pay an income tax rate as high as nearly 9 percent on the proceeds from selling that stock. Gray’s bill proposed to carve out a new 3 percent capital gains tax, with the hope of keeping funders and founders on the verge of an exit from fleeing the District, and encouraging new ones to move into the city.

Opponents blasted the measure as a giveaway to the rich. At-Large Councilman David Catania, who favored the new tax break, said the council “missed an opportunity to make ourselves more competitive and not less.”

The debate, as it did in July, when the measure was first discussed, saw old-school anti-poverty interests clash with the mayor’s efforts to spur tech entrepreneurship in the city. Catania provided the lone vote against pulling the tax incentive out of the larger bill and sending it to the Tax Revision Commission chaired by former Mayor Anthony Williams.

The other two major parts of the bill, both of which tweak the city’s existing tech incentives, look primed for final passage. One would extend citywide the patchwork of special zones that determine whether a tech company qualifies for some of those incentives, most importantly a five-year waiver of the corporate franchise tax. Under the second provision, the clock wouldn’t start ticking on that five-year period until a startup first becomes profitable.

Gray had sought to drum up tech community support for the legislation during two startup accelerator visits on Monday. Administration officials applauded the initial passage of the above two provisions, though expressed frustration with the decision to send the cap-gains break for further study. “It’s clear that there needs to be better understanding about how necessary and vital early stage capital is,” said David Zipper, director of business development and strategy within the office of the Deputy Mayor for Planning and Development.

Council opponents were no warmer to the measure than they were in July. Ward 4 Council member Muriel Bowser questioned the wisdom of a bill that would give “gifts of tax relief to some, and leave others without any.” Marion Barry, the Ward 8 Council representative, suggested the bill would direct a tax break to “comfortable people” at the expense of District residents below the poverty level. (It’s important to note, criticism of the bill wasn’t limited to the council. See this Greater Greater Washington posting by Ken Archer.)

Catania called the preservation of a the 8.95 percent income rate “a hollow victory” that leaves the District with a far higher rate than Maryland and Virginia, which in 2010 completely eliminated the capital gains tax on certain tech investments.


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