Capital-Gains Tax Cut Proposed for Rhode Island Entrepreneurs & Venture capital funds can apply for Kentucky-funded tax credits

Governor Carcieri is seeking to extend tax breaks to the owners and managers of companies that create jobs in Rhode Island.

Carcieri’s new legislative proposal would make the sale or exercise of stocks, bonds and other assets by the companies’ owners, and the people investing in these growing companies, exempt from the capital-gains tax.

By:
Andrea Stape
Providence Journal

http://www.nasvf.org/web/allpress.nsf/pages/8430

The individuals would be able to take advantage of the tax breaks only if their companies stay in the state, continue to add employees and increase sales.

The governor and the Rhode Island Economic Development Corporation have proposed the legislation as a way to encourage business investment and job growth in Rhode Island. The Economic Development Corporation has labeled it the "Creative Companies Act."

"It’s specifically linked to jobs and developing the creative economy," said Michael McMahon, executive director of the Economic Development Corporation.

However, both the Poverty Institute at the Rhode Island College School of Social Work and the Rhode Island Public Expenditure Council are taking hard looks at the legislation. The two groups are questioning how the tax exemptions will be administered, what kinds of jobs the program will create and whether it can really stimulate business investment in Rhode Island.

"I think this is really about demonstrating the effectiveness. The question has to be, ‘Is it worth it?’ " asked Nancy Gewirtz, founding director of the Poverty Institute, which provides data and analysis of the state’s low- to moderate-income population. "We’re in this tremendous budget crunch . . . Is this the best way to stimulate business?"

The proposed legislation would block any new applications for two existing tax breaks. One incentive gives employees at software companies income-tax breaks on the sale or transfer of corporate stock or stock options. The other gives venture capitalists an income-tax break based on their investments in local companies.

"The one lesson you know in being competitive is that you have to be willing to change," said McMahon. "If you lock yourself into one industry today you’ve hamstrung your ability to change."

The proposal would then set up the creative-companies tax exemption. Businesses that are interested in moving into the state, or entrepreneurs who are planning to start a company in Rhode Island, can apply to the Economic Development Corporation Board of Directors for certification as creative companies. The Economic Development Corporation would be able to give creative-company status only if a business showed it had the potential to generate $25 million in annual revenue and at least 200 "high-quality jobs," or a $10-million payroll. Companies from all industries would be able to apply for the special status.

Once the Economic Development Corporation board gives the certification, the company’s investors would not receive tax breaks for three years. In the fourth year, if the company can prove to the Economic Development Corporation that it has created 100 full-time employees or a payroll of at least $5 million, the company’s investors, its founders and management would get a 25-percent break on their capital-gains taxes. "High-quality jobs" are defined by the state as positions that pay at least 150 percent of the Rhode Island minimum wage.

If the company continues to add to its payroll in the state annually, its principals will have a greater percentage of their capital-gains taxes waived. By the seventh year after certification, if the company has 200 employees, the owners and management will pay no capital-gains tax on their sale of company stock or stock options.

Each company that receives the tax breaks must go back to the Economic Development Corporation each year for recertification, and only 20 companies at a time would be able to hold the preferred tax status. By waiving taxes on the money individuals make from the sale of stocks and investments, McMahon said, Rhode Island will look more attractive to the types of people who are known for starting and running businesses.

"Why isn’t Route 295 the creative-economy equivalent of Route 128?" asked McMahon, referring to the technology belt around Boston. "People have been talking about this for years — here’s a very efficient way to make it happen."

The state’s tax on gains from the sale of long-term assets is already set to be eliminated in 2008. But the new tax break would give business owners and investors a discount on the sale of short-term assets as well as stock options, according to McMahon.

He said the proposed legislation would not cost the state money, since it would benefit companies that are not yet operating in the state.

State economists have not yet done an analysis of how much revenue the law could generate by attracting companies to Rhode Island.

"If you’re going to . . . give tax incentives, then you’re doing it to create jobs. If you create jobs you’ll create more income for the state," said Gary Sasse, executive director with the Rhode Island Public Expenditure Council. "We need more information on the potential fiscal impact — if it’s not going to stimulate economic growth, then why bother?"

Sasse also questioned the way the application and certification process would be regulated. The state Division of Taxation would oversee regulation of the act, but the Economic Development Corporation would largely be responsible for deciding which companies have the potential to create jobs and thus are eligible for the tax breaks.

"The EDC picks the winners" and is also the organization "that the winners report their compliance too," said Sasse.

McMahon said there would be no room for favoritism, and that as executive director, he is running Economic Development Corporation "like a business." He said there are specific guidelines in the legislation which leave no room for interpretation, such as head counts and annual revenues.

"The benefits only kick in if the criteria is met. So we have a belt-and-suspenders check," said McMahon.

The Rhode Island Public Expenditure Council and the Poverty Institute also questioned the state’s definition of high-quality jobs as positions that pay 150 percent of the minimum wage. According to the Poverty Institute, that would be around $19,000 a year.

"What they are doing is creating a poverty-level job for a family of four," said Gewirtz.

McMahon, however, said the 150-percent definition is just a starting point.

"You have to put something in the bill to get the process started," said McMahon, who added that his definition of a good job is one that pays $25,000 a year and includes health benefits. "We want to make sure that the types of jobs that we encourage people to create are not just fancy, white-collar jobs . . . We want to make sure we can structure something that encourages all levels of job creation."

Ultimately, the tax breaks would apply to the people behind the businesses — the investors, founders and top management. McMahon said it provides a powerful incentive to entrepreneurs and investors looking for a place to locate a company.

However, capital-gains tax cuts nationally have had mixed results in attracting businesses, said Elizabeth McNichol, senior fellow at the Center on Budget and Policy Priorities, an think tank in Washington, D.C., focused on analyzing fiscal policies that affect low- and moderate-income people.

"When you survey businesspeople about why they pick a place, [taxes are] on the list, but it’s not at the top of list," said McNichol. "The evidence is that it doesn’t affect business location."

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Venture capital funds can apply for state-funded tax credits

By:
Jennifer Gordon
The Business Journal of Louisville

http://www.nasvf.org/web/allpress.nsf/pages/8425

Venture capital firms have until March 1 to submit an application for tax credits to Kentucky’s Office for the New Economy.

This is the second round of tax credits available under the Kentucky Investment Fund Act. In this round, $3 million in tax credits are available.

KIFA offers a 40 percent tax credit to personal and corporate investors who put money in approved investment funds. The investments must be made in Kentucky companies with 100 or fewer employees.

Eligible investments can be made in "any industrial, manufacturing, mining, mining reclamation for economic development, commercial, health care, agricultural enterprise or agribusiness activity," according to KIFA materials.

The Office for the New Economy fields the applications and then sends its recommendations to the Kentucky Economic Development Finance Authority for approval.

Three groups received credits last year

Three Louisville-based venture capital firms received KEDFA approval last year, said Donna Dutton, general counsel for the Office for the New Economy.

Vital Venture Capital LLC received approval for $1 million in credits, the maximum allotted under the program. The Yearling Fund I LP received approval for $790,000 in credits, and Evermore Investments LLC received approval for $235,000 in credits.

The Yearling Fund has not yet made any qualified investments, said Dale Boden, managing partner of The Yearling Fund.

But "we have several opportunities we’re pursuing that would qualify and be great candidates for this tax program," he said.

Boden said he has not decided whether to apply for tax credits in this second round, but "we’re analyzing it right now as we speak."

Four funds applied for the credits in the first round, but Dutton said she expects that "it will get better every year" and that "this year we hope to have more" applicants.

Dutton said that "assuming there was no problem" in the application process, she expects to make a recommendation on which funds should receive the credits to KEDFA officials by the agency’s May board meeting.

For more information on the tax credits, go to http://www.one-ky.com.