By Lisa Seachrist

Washington Editor

WASHINGTON — A coalition of entrepreneurs and investors voiced their unqualified support for a two-tiered capital gains tax cut incentive at a hearing of the House Ways and Means Committee.

The group called for incentives that specifically apply to the major investors in small start-up companies — venture capitalists. Specifically, the coalition endorsed a plan proposed by Rep. Jennifer Dunne (R-Wash.) in H.R. 1033 which would provide a general capital gains incentive as well as a targeted capital gains incentive for venture capitalists.

"We support a two-tiered approach to capital gains," said Chuck Ludlum, vice president of government relations at the Biotechnology Industry Organization (BIO), a member of the coalition. "We have worked a very long time on these types of bills."

Dunne's two-tiered approach to capital gains will provide a real cut of 8.2 percent in the capital gains tax for any capital asset that a person has, such as stock or real estate that is held for one year. The capital gains tax would drop from 28 percent to 19.8 percent and the gains would not be subject to alternative minimum tax. In addition, Dunne's bill has a venture capital provision nearly identical to venture capital bill H.R. 420, introduced by Rep. Bob Matsui (D-Calif.).

"The venture capital incentive is a true bipartisan effort that carries broad support," Ludlum said. "The across-the-board tax cut will be more work."

Part of the reason the venture capital incentive has such broad support is because it will have a very modest effect on budget considerations, since these incentives, H.R. 420 and H.R. 1033, simply amend existing law.

The original legislation enacted in 1993 provides a 50 percent capital gains exemption to individuals — but not to corporations — who make new investments in corporations with $50 million or less in capitalization. The investors must hold on to their stock for five years before they qualify for the tax exemption and 50 percent of the gains are subject to alternative minimum tax.

H.R. 420 and the venture capital provisions in H.R. 1033 provide the capital gains incentive for any individual or corporation that purchases new stock directly from the company and holds on to it for three years thereafter. A small company is defined as one that has less than $100 million in capitalization, and both bills allow that figure to be indexed for inflation, which the current law forbids. In addition, all of the gains are exempt from alternative minimum tax. The bills provide a roll-over clause that would defer taxes on gains for those who reinvest the money into another venture capital corporation.

While the coalition endorses both a broad-based capital gains incentive as well as the venture capital incentive, Ludlum noted that the broad-based incentive would put a heavy strain on balancing the budget.

However, he pointed out that last year the venture capital incentives were estimated at $200 million over 5 years, $400 million over 7 years and $700 million over 10 years. In the era of balancing the budget, Ludlum noted that "no matter how small the tax relief bill is — if there is one at all — there should be room for the venture capital incentive."

Even though the costs of such a bill are low, the benefits for small business could be quite large, said Christine Vaughn, a lawyer with Vinson & Elkins in Washington and counsel for the Alliance of Business Investors — a trade organization representing investment banks.

"The major change from current law offered by these bills is that it will allow corporations to reap the benefits of the venture capital gains incentives," Vaughn said. "Our members tell us that this type of incentive would make investing in small start-up corporations like biotechnology more attractive."

"This is an incentive that the industry should really pay attention to because biotech is the most venture capital- intensive industry in the country," Ludlum said. "And we need their help to get it through." *

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