WASHINGTON -- Rep. Robert Matsui, D.-Calif., plans tointroduce tax legislation that would provide capital gainsbreaks for investment in biotechnology and other companieswith less than $100 million in paid-in capital.

Matsui's plan comes amid growing pessimism about thechances for congressional extension of the research andexperimentation (R&E) tax credit this year.

Diane Sullivan, a tax and trade specialist for Matsui, describedthe proposed capital gains treatment at a governmentroundtable meeting of the Association of BiotechnologyCompanies on Friday.

Matsui, a member of the House Ways and Means Committee, andRep. Jim Moody, D.-Wis., are planning to introduce theEnterprise Capital Formation Act to add capital investmentincentives to the tax code, Sullivan said.

The bill provides a 50 percent reduction on net capital gainsfrom sale of stock held for at least five years. The holdingperiod helps ensure that the investment is "patient capital,"she said.

The lawmakers revised their plan to boost the maximum sizeof firms that would be eligible for the incentives from $50million to $100 million in paid-in capital. "We wanted to makesure that the biotechnology companies were covered," saidSullivan.

Companies with up to $5 million in paid-in capital would beeligible for targeted seed capital incentives. To encouragehigher-risk, long-term investments, these seed capitalincentives would provide a 50 percent reduction on net capitalgains after five years, plus an additional 10 percent reductionannually through the 10th year.

As currently planned, the incentives would apply to stockissued after Dec. 31.

Sen. Dale Bumpers, D.-Ariz., will introduce companionlegislation in the Senate, Sullivan said. Introduction of thebills may be delayed until September by efforts to recruitRepublican co-sponsors so that the legislation is bipartisan,she added.

On the R&E tax credit issue, Sullivan noted that Ways andMeans now handles legislation on a "pay-as-you-go" basis,meaning that new spending bills must be offset by newrevenues or cuts in other programs.

She told BioWorld that there is a "strong possibility" thatCongress will fail to extend the program. "The problem is thatthe tax credit costs money, and I just don't how you would payfor it," she said.

Under the current law, which expires in 1991, companies cancarry R&E tax credits forward for 15 years or back for threeyears. Michael Thornton, a staff member of the House Ways andMeans Committee, told the ABC roundtable in April that a one-year extension would cost the government $500 million, and$10 billion over five years.

Sullivan estimated the initial cost of the capital gainsprogram at $100 million, with less than $1 billion in revenueloss over five years.

-- Kris Herbst BioWorld Washington Bureau

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