By Lisa Seachrist

Washington Editor

WASHINGTON — Alleging that the basic "building blocks" used to enhance economic growth have not been properly constructed, Rep. Jennifer Dunn (R-Wash.) introduced legislation into the U.S. House of Representatives that would provide a capital gains tax incentive for long-term investments in small corporations.

In the bill, Dunn proposes altering the definition of a small company to include those with a market capitalization of up to $300 million and raising the gains exclusion from 50 percent to 75 percent.

The measure, H.R. 4685, is believed to have little chance of becoming law this term, scheduled to end this week. Dunn's aim is to put the issue at the top of the agenda for next year.

"It puts down a marker to show the commitment to the issue," a spokeswoman for Dunn said. "The bill serves as a marker to build upon and rally around. This way, we go into the next session of Congress with some momentum."

Because the 105th Congress concludes this year and the 106th Congress will be elected in November, Dunn will have to reintroduce the bill at the beginning of the session in January. Friday's introduction will allow staffers and members of Congress to familiarize themselves with the issue.

Dunn's district, which includes several biotechnology companies and software firms, is considered safe and she will serve as industry's "champion" in the effort to create a venture capital incentive, said Chuck Ludlam, vice president of government relations for the Biotechnology Industry Organization (BIO).

Ludlam said that, given the first budget surplus since the 1960s, he anticipates a rather large tax bill next year and the industry "needs to position itself to get a piece of it."

H.R. 4685 would allow investors who invested in small companies to exclude the tax on 75 percent of their gains when they sell their stock. In defining a small company as having a capitalization of $300 million or less, Dunn provides for an inflation adjustment for every year after 1999. In addition, Dunn's proposal drops the capital gains rate from 20 percent to 7 percent and allows investors to delay paying capital gains taxes if they reinvest in a similar company within 60 days.

"This bill, essentially, creates an incentive that would provide a revolving pool of capital that would be available to our companies," Ludlam said.

Secondary Market Investments Wouldn't Qualify

There are caveats, however. In order for an investment to qualify, it must represent a direct investment in the company, either as founder's stock, an initial public offering, a private placement, stock options or a public offering.

Investing on the secondary market wouldn't qualify because the money doesn't go directly to the company.

Also, the investment must be held for three years to qualify for the lower tax rate. The three-year provision is a reduction in the holding period from the current law's five years.

Dunn's bill also addresses the paper gains associated with exercising stock options, which currently fall under the alternative minimum tax of 28 percent. H.R. 4685 waives the alternative minimum tax for exercising stock options.

"This bill is absolutely tailor-made for the kinds of investments our companies require," Ludlam said. "In addition, it demonstrates a real understanding of how stock options operate." *