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D.C. Hopes To Lure Tech Investment With Capital Gains Tax Cut

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A D.C. Metro ad for a service LivingSocial rolled out in 2011. D.C. lawmakers recently struck a $33 million tax break deal with the company to keep its headquarters in the city.
Elvert Barnes (http://www.flickr.com/photos/perspective/5952219647/)
A D.C. Metro ad for a service LivingSocial rolled out in 2011. D.C. lawmakers recently struck a $33 million tax break deal with the company to keep its headquarters in the city.

D.C. continues its push to become one of the most tech-friendly cities in the U.S. Last month, the city government gave a big tax break to LivingSocial, a D.C.-based company that offers daily e-deals on restaurants, vacations and other services. Now, city lawmakers are hoping to spur more similar investment in D.C. by offering a steep tax break to residents who invest in local tech firms. 

By lowering the capital gains tax rate for investments in D.C.-based technology firms from 8.95 percent to 3 percent, officials are not only hoping to increase cash-flow for new start-ups.  

They're also hoping to "change the behavior of people who are investing in the District," said David Zipper, an official in the deputy mayor's office said at a hearing in May. The legislation is modeled after a similar proposal that was passed in New York City.

"Many of those investors in New York have been nudged to shift their money from say real estate or mutual funds toward angel investment," Zipper says.  "Angel" or early stage investors get involved in companies in the early stages, hoping to find the next big tech company.

"Because it's fun, they're growing the local tech sector in that kind of way," Zipper says. For the tech community in D.C. to compete with Silicon Valley, it needs investors in the city to act more like their West Coast counterparts, Zipper adds. The tax break would also encourage startups looking to cash in to stay in D.C. 

But some watchdogs question whether wealthy D.C. residents should get a special tax break.

"It would essentially create D.C.'s version of the  Warren Buffet Problem, in which low-paid workers are paying a higher income tax on their earnings than some of the highest income investors," says Ed Lazere with the advocacy group the D.C. Fiscal Policy Institute.

Lazere also questions why the tax break applies to both individuals and venture capital companies. As for the companies in question, Lazere notes  that the measure would apply not just to investments in new startups, but in investments in all technology companies based in D.C., regardless of how large they are or how long they have been around. 

"Calling this an angel investor incentive is a misnomer because the tax breaks would not be limited to new firms that are tryign to grow," says Lazere.

The D.C. Council will take up the legislation tomorrow.

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