The Capital Gains Tax Cut Monster

Chuck Sheketoff

A few years back, OCPP likened the idea of cutting the income tax on capital gains to a B-movie monster: a hard-to-kill ugly creature that refuses to die.

True to script, the call to cut the income tax on capital gains has resurfaced this election year in Oregon. The two main gubernatorial candidates have both floated some version of it.

And just this week the Oregon Business Association put out another complaint (PDF) about Oregon’s income tax on capital gains, painting it as bad for Oregon’s business climate. OBA’s claim comes on the heels of the tired argument we heard during the campaign on Measures 66 from opponents such as venture capitalist Bob Wiggins that the measure “will discourage investment in Oregon startups.”

News posted late Thursday that venture capital investments are up in Oregon in 2010 is proof positive that corporate Oregon’s continued complaints about Oregon’s income tax on capital gains stifles investments is just plain wrong:

Oregon companies attracted $106 million in venture capital during the first half of the 2010, the biggest take in four years, according to data due out tomorrow morning from the National Venture Capital Association and Thomson Reuters.

Rather than propose policy fit for a Hollywood fantasy, our candidates for governor and corporate Oregon should heed the real-world facts.

Back in 2008, OCPP noted that there’s no evidence that Oregon’s tax structure inhibits additional venture capital investment, as Oregon’s venture capital investments saw big gains in 2007. They rose to $302 million in 2007 from $153 million the prior year. And on a per capita basis, the growth in venture capital catapulted Oregon to ninth place among all states (including the District of Columbia) from 19th place in 2006. Oregon's venture capital investments per capita in 2007 were at least double those of 32 other states.

This week's story in The Oregonian about venture capital investment this year is further evidence that our tax system does not inhibit such investments.

The only things a tax break for capital gains would achieve would be to reduce the state’s revenues and vital programs and line the pockets of the wealthiest Oregonians.

Coming at a time when Oregon’s budget is already under strain, proposing a tax break for capital gains is not just a misguided idea. It’s a real monster.

Comments

  • (Show?)

    Since you've called me out by name, I guess I'll take a few minutes to respond.

    You're still wrong Chuck. Oregon's high capital gains rate does adversely affect the financing of Oregon start-ups.

    In most cases, the seed financing of start-ups comes from "angel" investors--wealthy individuals who put up the first few hundred thousand dollars to get a business off the ground.

    Many of the individuals who have performed this function in our area over the last 20 years are no longer Oregon residents and many of those that have left no longer invest in Oregon start-ups.

    Why have they left? Oregon's ridiculously high capital gains rate was in many cases a major reason.

    Of the $123 milliion in "venture capital" referred to in Mike Rogoway's article, $50 million was in one deal, Home Dialysis, which was funded by Warburg Pincus. WP does not have nexis with Oregon and is not subject to Oregon's capital gains tax even though Home Dialysis is an Oregon company. Home Dialysis was fortunate to stay in the game long enough to attract WP's attention. This is an unusually large venture capital deal for Oregon.

    Another almost $50 million of the total is solar and other energy deals, which depend on the heavy tax and other subsidies that we provide to those lines of business (which I think you oppose, right Chuck?)

    Oregon's absurdly high capital gain rate has adversely affected angel investment in our market. This means that many promising start-ups do not get to the point that they can attract venture capital from outside the area. And Oregon's high capital gain rate makes it less likely that home grown venture capital firms like mine will continue to do business here.

    Dudley and Kitzhaber are exactly right to want to address this very real problem.

    Bob Wiggins Mount Hood Equity Partners

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      Doesn't Oregon's lack of a sales tax offer some costs/input insulation for start up firms? Isn't proximity to market and support services a determinant factor in the viability of a location to support a start-up? It seems like this argument happens in a vacuum. If an innovative idea has a real and discernible market, the competition has no like products that can compete as well, the life cycle of the product seems long and robust, the operations and management team seems solid, the input costs look stable and have some redundancy and spin-off/cash out scenarios in five years look promising, are you honestly going to walk away because of a back-end tax rate somewhat higher than you like? My point is that the actual investment criteria in the high risk area of venture capital/start ups are more sharply focused on the overall viability of the widget, its market and chances for success. Now, I know you'd like to pay nothing, who wouldn't? But if you stand back and look at the macro-economic effect of lowering the tax rate here, i.e., the prospective the state is charged with keeping, are we better served maintaining the resources to support the development of quality start up ventures like higher education, business services, market research and development, industry "clustering" etc., or using those same funds to sweeten the back end deal for a few investors that are most likely more concerned with their prospective investments' chances for success anyway?

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        Brian, many of the things you list are of course relevant to whether a start-up will succeed or not. But the mother's milk of getting a business started is money, and seed and early-stage money comes generally from wealthy individuals (angels), not institutional venture capital. Oregon's highest-in-the-nation rate on capital gains has caused high net worth individuals to move out of the state. Many of the ones who have left were active angels in Oregon start-ups and now are not. Oregon's high capital gain rate doesn't mean that no businesses will start here, but it has reduced the pool of investors who are willing to take the risk of providing seed capital.

        This isn't a choice between a zero tax rate on capital gains and the current 11%. We just need to have a rate that is competitive with other states. We're not anywhere near that now.

        Bob Wiggins

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    Chuck,

    Just curious, how many for-profit ventures have you financed? How many for-profit businesses have you run?

  • (Show?)

    I encourage BlueOregon readers to read Len Burman's memo on capital gains taxes (PDF). Burman wrote THE book on capital gains, The Labyrinth of Capital Gains Tax Policy: A Guide for the Perplexed.

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    I should also note that despite all his talk, Bob Wiggins still lives in Oregon and still invests in Oregon businesses and still recruits and advises people to do so through his company and as an active member in Oregon's investors community.

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    I've never seen any evidence, anecdotal or otherwise, that Oregon's high capital gains tax discourages people from making investments here.

    In the first place, many such investments are in the form of stock or other intangible personal property which is only taxed in Oregon if the person who owns the capital asset lives in Oregon at the time of the sale.

    Second, at the time of the initial investment, investors are far more concerned with the likelihood their investment will ultimately be profitable than with the tax that will be paid if it is.

    On the other hand, I personally know a number of people, and have heard of many others, who move to Washington or Nevada before realizing substantial capital gains (from sales of stocks and other intangible personal property)to avoid the Oregon capital gains tax.

    However, I haven't seen an estimate of what this costs Oregon in lost tax revenues. I do know, however, that those people tend to be high-income earners generally, and by moving we lose tax revenue from their on-going income, not just their one-time capital gain windfall.

    • (Show?)

      Jack, the high income people who leave the state are often the ones who, before they left, made investments in early-stage companies in Oregon, getting these businesses off the ground so they could get to the point where they might attract investment from out-of-state venture capital firms. Some people who have left have remained engaged in Oregon's entrepreneurial environment, but many have not. I don't know what kind of "evidence" you need to understand this, but this is what I do for a living, and I see the evidence every day.

      Bob Wiggins

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    Bob, I'm amenable to data that supports your claim, but citing "some people" is wholly unconvincing. If you don't have the data, you should find it, and if you are unwilling to do that, you should at least give some examples of actual people/businesses who are leaving the state.

    Otherwise, this is a silly conversation. Chuck has actual data; your response?

    • (Show?)

      Jeff, all I have is anectdotal evidence, but I am actually involved as a participant in the world we're discussing here. Chuck is not.

      In any event, here's a statistic for you: of the partners in my Fund who were Oregon residents 10 years ago, 20% no longer are. To me, that's a troubling number.

      Bob Wiggins

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    The answer would be the null set.

    However, it has been reported that Chuck's dad has a very successful oil distributorship back east that has produced jobs, revenue and tax receipts.

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    Chuck and Mr Jeff Alworth if our business climate is so great and our total tax burden is as low as you claim which its not then can you explain to us please why Oregon still has a double digit unemployment rate then?

  • (Show?)

    Numerous anecdotes don't make data. It would likely be malpractice for an accountant or a lawyer advising someone who is going to come into money to not ask if they are in a position to, and want to, move out of state.But that doesn't mean they all do, and wealthy people move here and die here.

    Moreover, don't get lost in the capital gains trees. When the national economy does well, Oregon really well. The 1990s were boom years nationally in Oregon, with our income tax on capital gains.

    Oregon’s Gross State Product growth outpaced the nation each year beginning in 1988 until 2000. Between 1995 and 2000, Oregon was the fastest growing state for GSP. In the 1990s, Oregon’s economy created 385,000 jobs, averaging 2.8 percent growth annually, making it the 10th fastest growing state for employment in the country.

    In the last business cycle, Oregon’s economy as measured by Oregon gross domestic product was 28 percent larger by the time the cycle ended, after adjusting for inflation. This amounts to an annual growth rate of 4 percent, outperforming the 2.5 percent annual growth rate of total U.S. gross domestic product.

    Venture capital investments are not the be all and end all of determining business climate. And large investments by out of state investors shouldn't be belittled as done in one response to my post. Those investments recognize that Oregon is a great place to start and grow a business.

    Those worried about our business climate ought to be more concerned about the state having adequate resources to fund essential public structures like K-12 education, higher ed, public safety, health care, long term care for the aged and disabled, and our judicial system. Those, and fixing the spendthrift policy of spending unanticipated revenues instead of saving them for downturns in the business cycle, ought to be priorities for anyone concerned about our business climate.

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    Today's news that Portland's Puppet Labs landed $5 million in venture capital from the Silicon Valley and is adding employees to the 17 now there (up from 3 when the company moved to Oregon) is another example of Oregon being a great place to do business. Oregon's income tax on capital gains did not dissuade Puppet's growth in employees or business.

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      Chuck, it's interesting to me that you assert that anecdotal information doesn't matter in one comment and then in the very next comment you refer to another anecdote that you think supports your position.

      The Puppet Labs deal appears to be very good news for the area. It doesn't support your argument in favor of Oregon's highest-in-the-country capital gains rate though. Kliener Perkins, the investor, is not subject to the Oregon income tax so, again, like the case of the investor in Home Dialysis, our stupidly high capital gain rate wouldn't matter to them. To the extent we can get out-of-state entities to invest in Oregon businesses, that's great.

      The problem is that Oregon's high capital gains rate makes it less likely any investors that are subject to the tax will remain here and invest here. And if they don't, that makes it less likely start-ups will get to the point where they will be interesting to out-of-state investors. That doesn't mean it will never happen; but it's less likely.

      Do you really not understand what I'm saying, or is it just a problem for the position you favor, so you choose to ignor it?

      Bob Wiggins

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        I said the investment in Puppet showed we have a good business climate. And the top brass running Puppet who would undoubtedly have some capital gains down the line if the company really takes off as the out of state investors think it will are located here and growing their business here. Those opposing Oregon's income tax on capital gains says it hurts our business climate and needs to be cut to create jobs. With Puppet you have a business that moved here and is growing without Oregon lowering its income tax on capital gains.

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