The D.C. Council is set to take up a bill Tuesday that would give a tax break to those who sell their investments in local tech companies at a profit, a move that the District's top financial adviser says could hurt the city's finances.
"It's terrible public policy," said Ed Lazere, executive director of the DC Fiscal Policy Institute. "This is not about 'angel investors,' this is about letting some very wealthy people who are about to make a lot of money pay a lot lower tax rate than you or I."
The bill, pushed by Mayor Vincent Gray and called the Technology Sector Enhancement Act of 2012, aims to encourage investment in local technology companies and keep those companies in the District. Just weeks after the council preliminarily approved a $32 million tax break for the D.C.-based online coupon company LivingSocial, this proposal would reduce the capital gains tax rate of those who sell their investment in tech companies by roughly two-thirds -- down to 3 percent.
The discount applies only to qualifying companies, and investors have to hold their investment for at least two years.
Proponents say the legislation is aimed at stopping local startups from moving out of the city before the companies go public so founders can get a lower tax rate on the sale of shares. Mayoral spokesman Pedro Ribeiro said the District is at risk of losing investors, companies and the revenue that they subsequently generate because of the city's 8.6 percent capital gains tax, compared with 4 percent in Virginia.
"We believe in the long run by keeping them here it'll be better for the District," Ribeiro said.
Still, the District chief financial officer's analysis of the legislation says there's much uncertainty about whether the city would make up the difference in its future tax collections.
"This future negative impact cannot be reliably estimated at this time, but it could be substantial," CFO Natwar Gandhi said in a statement. He added later, "Depending on the IPO price and the subsequent trading, the revenue losses could be significant."
Still, Gandhi noted that many people who invest in startups live outside of the District and wouldn't be subject to the city's capital gains tax anyway.
But Lazere said the uncertainty of the bill's impact should give city politicians pause.
"[The CFO] is saying it could cost the city a lot of money because they don't know exactly how much will cost," he said.