WASHINGTON _ The nation's Capitol is awash in hearings as theRepublican-led Congress considers enactment of the ten bills thatcomprise the Contract with America. High on the agenda is how torewrite tax laws and the powerful House Ways & Means Committeeheld hearings on Tuesday and Wednesday that touched upon one ofthe biotechnology industry's long-sought goals: a reduction in thecapital gains tax.

The momentum for a capital gains tax cut is growing, but somethorny issues remain. The huge federal deficit looming on the horizonmakes some legislators nervous about shrinking government receipts.And experts say cuts meant to spur the economy_like the capitalgains tax cut_will be meaningless unless the deficit is brought undercontrol. Yet most believe changes in the capital gains tax structureare a sure thing.

"We are very optimistic that the Republican-controlled Congress willenact a capital gains incentive," Chuck Ludlam, vice president ofgovernment relations for the Biotechnology Industry Organization(BIO) told BioWorld. "The issue for us is what kind of incentive.Will it be one that takes into account the extraordinary capitalformation issues of the biotech industry?"

Capital formation, arguably the biotechnology industry's mostdaunting challenge (followed closely by getting drugs to work inclinical trials), is one of three top political priorities chosen by BIOfor 1995. (The other two are price controls and FDA reform.) RobertBeckman, chairman of BIO's emerging companies task force andpresident and CEO of Purchase, New York-based Intergen Co., toldlawmakers on Wednesday that the industry is in the midst of the"worst financial crisis in its history."

According to Beckman and a host of other experts and advocates whotestified before the committee, a reduction in the capital gains taxwould encourage more venture capitalists to put their money at risk inlong-term, speculative investments.

But BIO is promoting a targeted capital gains package that is avariation on the Republicans' Contract with America proposal. Thatproposal, master-minded by longtime capital gains tax cut advocateand current chairman of the Ways & Means committee Rep. BillArcher (R-Texas), calls for an across-the-board 50 percent cut ontaxes for any capital asset, new or old, held for more than one year.

BIO has Proposals

BIO seeks to sweeten the Archer bill by the addition of a "secondtier" incentive targeted at direct investments in the stock of emergingcompanies. Actually, the two-tier approach originated in the Senatein 1989, when it was first proposed by Sen. Robert Packwood (R-Ore.), who is now chairman of the Senate Finance Committee.

Packwood advocated a combined across-the-board capital gains taxcut and a targeted venture capital gains incentive. The capital gainsreduction included a sliding scale, depending on the length of timethe capital asset had been held. It also proposed that "qualifiedventure capital stock" held for four or five years receive a gains taxreduction which was roughly twice as great as the incentive for non-venture capital stock.

Although Packwood's proposal died in the Senate, a targeted capitalgains tax reduction was endorsed by both President Bush andGovernor Clinton during the 1992 presidential campaign. Thatincentive called for a 50 percent reduction in capital gains taxes fordirect investments in the stock (bought directly from a company noton the open market) of a small company, with $100 million or lessaggregate market capitalization, if the investment were held for atleast five years. The incentive applied to investments made by bothindividual and corporate taxpayers after the effective date of the law.

After taking office and facing budget realities, Clinton and vicepresident Al Gore proposed a more limited targeted capital gainsincentive which became law in the 1993 Budget Reconciliation Act.Their proposal lowered the capitalization limit of small companies to$50 million or less, did not index the figure for inflation, and appliedthe incentive only to individual taxpayers, among other things. BIOclaims those limits "effectively gutted the incentive."

Capital Gains Incentives Needed

"The reduction in the number of companies which qualify (for thecapitalization ceiling) is particularly critical to the biotechnologyindustry, which needs to raise huge amounts of capital to fundresearch," explained Beckman. "Corporate taxpayers are majorinvestors in small companies, so it is important to cover them withthis incentive."

Beckman claimed that an informal survey of BIO member companiesshowed that the Clinton/Gore incentive "has not been a factor informing capital for entrepreneurs and emerging companies."However, it's clear that other factors unique to the biotechnologyindustry may be hampering capital formation.

Beckman made clear that BIO sees the Packwood-variant of atargeted gains cut as a supplement to Archer's across-the-board cut."The targeted incentive would ensure that there exists a distinct andmore powerful incentive for high-risk, long-term investments inentrepreneurial firms and emerging companies," said Beckman.

The BIO-backed second tier incentive would include the followingfeatures, among others:

* Increase the capitalization ceiling to at least $100 million, oreliminate it altogether, and index any capitalization ceiling forinflation;

* Apply the incentive to corporate taxpayers;

* Provide a gains exclusion that is greater than that which is providedfor all other capital assets (e.g., if the regular capital gains exclusionis 50 percent, the exclusion for a targeted incentive would be 75 or100 percent);

* Eliminate the per taxpayer dollar amount limitations;

* Change current "working capital" rules which BIO charges are"unworkable'';

* Apply the incentive to investments made before the effective dateof any legislation. n

-- Lisa Piercey Washington Editor

(c) 1997 American Health Consultants. All rights reserved.