Reforming Portland's Venture Capital Tax

The Portland Business Journal reports on Portland City Commissioner Sam Adams' and Multnomah County Commissioner Jeff Cogen's efforts to reform Portland's venture capital tax:

Portland and Multnomah County may soon kill a local business income tax on capital gains.

Both the City Council and County Commission are expected to approve the change later this month. If they do, venture capital firms will no longer pay a combined 3.65 percent tax on the gains made by investing in small companies. The change will rectify what venture capitalists say has been unfair treatment that has driven them out of town.

"Frankly, this is how it's done everywhere else in the country," said Jeff Cogen, a Multnomah County commissioner who's been working on the issue with Portland City Commissioner Sam Adams, Portland's revenue bureau, several venture capitalists and attorneys. "We need an equal playing field, so when [venture capitalists] are looking to locate, they will want to locate here."

Currently, both Multnomah County and the City of Portland have overlapping venture capital taxes of 1.45% and 2.2% respectively. Michael at Witigonen declares his support for the cooperative effort, arguing that it will attract business to Portland:

As reported by Bizjournals, Portland and Multnomah County are working together to finally end the venture capital tax. This tax, in my opinion, is instrumental in slowing down Portland's growth and innovation. By providing a strong incentive for wealthy VC firms to NOT locate in Portland we're basically saying that the growing entrepreneurship trends aren't worth our time, which is hideously stupid. The current system double taxes by putting a combined 3.65% on capital gains. In response, rich firms are moving all of their business to the suburbs. Portland needs these firms. Without them, we're going to languish; with them, we'll have taken a large step on the path towards bursting out of our regional focus and making Portland the city that we all want her to be.

Thank you, Jeff Cogen and Sam Adams.

Discuss.

  • Lennon (unverified)
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    I can see legitimate arguments to be made on either side of this issue. On the one hand, everyone agrees that small businesses are a Good Thing, and VC can help those businesses flourish, at least in the "sexy" market segments that produce the kind of potential gains that appeal to VC firms.

    On the other hand, though, this is a proposed tax break that would basically go straight into the pockets of only very rich investors. Furthermore, the kinds of businesses that receive venture capital tend to be in the high tech and finance arenas -- in other words, market segments that can produce the kind of astronomical growth that justifies the kind of massive injection of cash that venture capital provides.

    These businesses can be very profitable, but don't provide the kind of stable employment base that builds long-term stability in a region. Furthermore, IT and finance aren't exactly known as the best examples of diversity and fair hiring practices. (I say this in all humility as a well-paid, male, white IT professional.)

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    This has nothing to do with the limited partners, the investors, but with the general partners, the managers of the fund. Other funds like mutual funds are not taxed today, but venture funds are. This only forces the funds out of the city. At this point there are no venture funds based in the city since the last ones moved out in the past year. It is not that the general partners will not pay taxes when they receive distributions, but they will not be taxed more than once. The limited partners will also pay taxes when they get a distribution. The only loosers in the curent system is the economic vitality of the city that loses business activity to the suburbs. By fixing this tax, the city will be on equal terms with the suburbs.

  • Craig Winters (unverified)
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    We should have a tax that taxes income similarly whether it's work income or investment income. We're treating middle class wage earners unfairly when we give capital gains tax breaks to the wealthy and leaving the burden on people who work and create value for a living.

    Capital gains tax cuts are a good way to make friends with wealthy donors and opinion makers, and a good short-term bribe to encourage temporary investment and profit-taking, but such cuts are not sustainable. If we move to a system that taxes work income hugely more than investment, which is what the right-wing wants, it will create unfairness in favor of wealth and ownership over work.

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    Again, this is not an issue of capital gains vs. wage tax rates. This is a question of whether a type of business gets taxed at a higher rate than similarly situated businesses. Should managers of venture funds get taxed more than managers of mutual funds? We are talking city taxes here, not state or federal. There is a reasonable argument that Craig raises about capital gains rates vs. wage rates, but that has to be made at the national level. In this particular case, all of the venture funds have moved out of Portland to Washington or Clackamas counties. In addition, Oregon as a whole suffers from a severe lack of venture capital. Chasing it away is not in our state's interest.

  • Warren Fish (unverified)
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    As someone working to fix our local policy on Venture Capital firms, I wanted to weigh in on this discussion. Commissioner Cogen and Commissioner Adams recognized that Portland and Multnomah County have effectively walled our community off from Venture Capital firms. Local business taxes were applying to the investment returns of Venture Capital fund investors and managers at the fund level. Because returns were taxed this way in our City and County, but not on Kruse Way or in any other nearby location, locating here became uncompetitive and we more or less drove any firms here out. (Some firms did keep a toehold in our community while conducting key business meetings and locating operational activities outside our jurisdiction).

    We are able to fix this problem with no negative fiscal impact on the City or County because no firms have chosen to subject their fund investors to this tax. In effect, our tax policy was so good at keeping Venture Capital firms away that they all kept away.

    But we want Venture Capital firms to locate in our community. Venture Capital helps start-up companies thrive, incubates good ideas, enhances management, takes established firms to the next level, and helps create new jobs. In a creative place like Portland, small business is the absolute lifeblood of the economy. A tax that was cutting our local business community off from Venture Capital simply made no sense. We are fixing this problem, but doing so in a way that preserves the integrity and fairness of the system as a whole.

    Warren Fish Policy Advisor Commissioner Jeff Cogen's Office

  • andy (unverified)
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    <h2>I'm actually surprised that city hall even understands dynamic scoring. Typically they just assume that people will pay whatever taxes that are imposed. Here is a good example where the increased tax resulted in decreased revenue since the affected parties left the city. The city ended up getting zero tax revenue from VC's since they all moved across the border to avoid the tax. Which is of course what people said would happen but city hall wasn't listening back then.</h2>
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