By Lisa Seachrist

Washington Editor

WASHINGTON — With the 1998 budget battle behind them, a coalition of entrepreneurs is readying to keep Congress focused on tax incentives that breed innovation while the lawmakers hammer out the 1999 budget.

In a letter to House Ways and Means Committee Chairman Bill Archer (R-Texas), the coalition, which included the Biotechnology Industry Organization (BIO), the Council of Growing Companies and the National Venture Capital Association, cited several types of tax incentive that should be considered in next year's tax bill.

"Chairman Archer gave us an opportunity to present our views when he invited members of the Ways and Means Committee to come up with ideas for the tax bill in a Nov. 13 letter," said Chuck Ludlam, BIO's vice president of government relations. "Our letter is by no means a definitive list. We just want to be sure that should there be a tax bill next year, it is balanced between tax relief and tax incentives."

Instead, the organizations offered a list of the types of incentives that, if included in the tax bill, will reward entrepreneurial companies for investing in research and innovation. Included in that list were suggestions to make the research and development tax credit permanent, to reduce the rate for the broad-based capital gains incentive and to repeal the minimum tax for incentive stock options.

"Right now, this is just a list of general concepts," Ludlam said. "Next year, we will work on the specifics. But we wanted to try to frame the terms of the debate."

Last year, Ludlam noted that in the 1997 tax bill, which included $90 billion in tax relief and tax incentives, 26 percent of the total was for tax incentives including making the orphan drug tax credit permanent.

"This past year was a very successful effort," Ludlam said.

However, industry can't count on such success this year. First, with the passage of the balanced budget, any tax bill will be a much smaller undertaking. Second, the politics of the election year will make it difficult for lawmakers to support measures that look like corporate tax breaks.

In its letter to Archer, the coalition pointed out: "Entrepreneurial companies are today's leaders in job creation, technological innovation and international competitiveness. America's future economic well being lies in the hands of today's emerging companies. Entrepreneurship, therefore, should be the central organizing principle for our nation's economic policy and a key touchstone for any tax bill."

R&D Tax Credit Tagged As Priority

First and foremost among the suggestions for any tax bill was a provision to make the Research and Development Tax credit permanent. The R&D tax credit allows companies to write off expenses associated with research and development. The credit was extended this year, but expires on June 30, 1998.

"Between 1995 and 1996, the R&D tax credit lapsed," Ludlam said. "Making this tax credit permanent will allow our companies to plan their research and development expenditures. This is our highest priority."

In addition, the coalition is suggesting a venture capital incentive which would encourage investment in entrepreneurial firms. The 1997 tax bill allows for a rollover of gains, with a deferral of capital gains taxes for direct investment in the stock of companies with $50 million or less in capitalization. The coalition has suggested that the ceiling be raised to $400 million. The letter also suggests that 75 percent of the gains be exempted from tax for individual investors and 50 percent of the gains for corporate investors, and that the holding period for the stocks be decreased from five to three years.

"We came so close last Congress to getting this venture capital incentive that we're trying again," Ludlam said.

Current law restricts a company's ability to use its tax losses, net operating losses (NOL), when the company changes ownership. While the law is intended to prevent one company from acquiring another simply to acquire and use its tax losses, the restrictions limit the ability of small firms to raise capital for R&D because it applies if there is a 50 percent change in ownership. For many companies, simply having a stock offering could trigger a 50 percent change in ownership, which would wipe out their NOL.

The coalition suggests that lawmakers should amend the law to prevent a company that needs capital from finding themselves in the Catch-22 of needing to conduct an offering only to lose their ability to write off their losses.

"There is a saying that corporations don't vote," Ludlam said. "So we are working hard to be sure that any tax bill is balanced. If we don't win on this point, no amount of lobbying on any specific incentive is going to make any difference." *

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