The District Council voted overwhelmingly on Wednesday against a tax break for tech entrepreneurs -- a special capital gains rate of 3 percent for selected tech investments. Mayor Vincent Gray had supported the measure because Virginia, which has a special 0 percent capital gains tax rate for certain technology investments, is poaching business investment and taking jobs that might come to the District if not for its 8.95 percent rate.
Gray's rationale for supporting the provision is sound. But whatever his intentions, and regardless of the council's motives for scrapping the proposal, this is not the way to write tax policy. We stand for lower taxes in principle, but there's no reason the District's government should privilege one form of legitimate business investment over another. The problem in D.C. is not that some specific part of the economy is overtaxed, but that they all are.
As Ken Archer, of the liberal Greater Greater Washington blog, pointed out, special loopholes like the one the council considered will most likely motivate companies to stretch the definition of "tech" far enough to qualify themselves for the special rate. Tax breaks and loopholes that apply only to particular industries distort economic activity and confer very limited benefits. Over time, they have become governments' tools of choice for manipulating entire sectors of the economy. Sometimes, they are even used to benefit just one or two companies at their competitors' expense.
Meanwhile, the District has an extremely uncompetitive tax rate. At 8.95 percent, D.C. has one of America's highest top marginal tax rates on capital gains, and by far the highest in the region. This does not only affect technology investments, but all business investments. Tax rates are certainly not the only factor that entrepreneurs consider when choosing where to invest, but they are a consideration that can tip the balance -- especially when all other things are equal. The tax rate is also one of the very few business conditions over which government has complete control.
Instead of looking for a way to become the nation's next Silicon Valley, the District's leaders should be making the District friendlier to all business enterprises. Ideally, they would impose a lower rate on as broad a tax base as possible, and with no special breaks or loopholes for anyone. The District has a lot to offer business investors in technology and in every other field. It shouldn't let excessive tax rates get in the way.