House Votes To Raise Fund Managers' Tax

by Leroy Baker, Tax-News.com, New York

02 June 2010

The US National Venture Capital Association (NVCA) has expressed 'profound disappointment and serious concern' over the House of Representatives’s narrow approval of the bill HR 4213, which doubles the taxes on venture capitalists in order to pay for temporary corporate and individual tax break extensions.

Specifically, a provision in the bill changes the tax status of venture capital carried interest from capital gains to an ordinary income/capital gains blend, which, according to the NVCA, effectively removes any meaningful tax incentive for long-term investment in new companies. The provision changes the taxation of carried interest from capital gains to 75% ordinary income and 25% capital gains. It would be in full effect in 2013 but will begin a graduated change in 2011.

The bill now moves to the Senate where the NVCA hopes that lawmakers will correct the problematic provision.

“The House of Representatives today failed to recognize the serious economic consequences of their actions,” said Mark Heesen, president of the NVCA. “It is both ironic and disconcerting that legislators can profess commitment to creating jobs – and then discourage the type of long term investment which has been a proven job creator for the last century."

Heesen continued:

"We are one step closer to unraveling an economic model that has made America the global center of entrepreneurship and innovation. We urge the US Senate to make the necessary changes to maintain a meaningful incentive for long term investment in the start-up economy.”

"In the last several weeks, thousands of entrepreneurs, chief executive officers and academics have voiced strong support for maintaining capital gains tax status for venture capital carried interest. These supporters represent the most promising, innovative industry sectors in the country including clean technology, life sciences and information technology."

"The fact that the tax change would be permanent despite its use as a revenue raiser for one-year tax extensions suggests a misalignment of policy goals. To those House members who consistently express interest in bringing more venture capital investment to their districts and states, I can tell you unequivocally that this is how not to attract investment. Today, you let down the venture capital community, the entrepreneurs that receive venture funding, and the innovators who bring new technologies to market."

"If this bill is signed into law, Congress should expect a further decline of venture investment over time, a move away from seed and early stage investment, and less innovation and job creation for our country.”

"Many alternatives that would have increased taxes on carried interest and raised revenue, but not to the draconian levels in HR 4213, were presented to House members. Those alternatives remain viable options for the Senate. We hope the Senate will consider carried interest options that still raise considerable revenue without discouraging important investment activity."

Heesen concluded: "They have the opportunity to support economic growth and innovation in their states – and throughout the country. Let’s hope they seize it.”

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