Investors who fund tech startups in Virginia over the next three years won’t pay a dime in state capital gains tax on the eventual profits — part of the commonwealth’s aggressive bid to lure new technology investment through a package of new incentives and policy changes. State officials are betting that the benefits of attracting corporate relocations, startups and venture capital will outweigh the loss of immediate or potential tax revenue. And they’ve placed an especially heavy stake in the tech sector, offering a bundle of enticements geared specifically for IT, biotech, green energy and other related enterprises.
Maryland also queued up two key tax policy changes for July 1, passing a 10-year extension of the research-and-development tax credit and increasing funding for the coveted biotech tax credit to $8 million, from $6 million. Montgomery County has passed, but not yet funded, a similar supplemental credit. Virginia’s long-term capital gains exclusion will mean a venture capitalist who backs a successful startup, and the entrepreneur, could see millions in additional profits when they sell the company years later.
“That’s a pretty powerful message,” said John Backus, founder and managing partner of Reston-based venture capital fund New Atlantic Ventures. Every entrepreneur, he said, has big dreams when he or she starts a business. And though not all of them fulfill those dreams, “the ones who do are going to make a lot of money” under the capital gains tax break.
Virginia taxes capital gains at the same rate as income: 5.75 percent. To qualify, the company must have had less than $3 million in revenue in the fiscal year prior to the investment, which must take place before June 2013. The exemption, sponsored by Sen. Mark Herring, D-Leesburg, passed nearly unopposed in both the Virginia House and Senate this year with
the heavy backing of Republican Gov. Bob McDonnell.
Backus co-chaired the technology policy work group for McDonnell’s transition team. Virginia lawmakers also upped the $3 million cap for the perennially oversubscribed angel investor tax credit to $5 million. They put in place a $500 tax credit for each clean-energy job an employer creates, up to 350 jobs. Tech companies could also benefit from a change to the major business facility job tax credit, as the General Assembly lowered the job-creation threshold for receiving the $1,000 credit from 100 new employees to 50.
“For us, it’s all about competitive advantage,” said Josh Levi, vice president of policy for the Northern Virginia Technology Council. “These tools give us a competitive advantage in ensuring Virginia is the preferred destination for technology businesses.”
That escalating competition — fueled by more and more tax dollars — is starkly on display as Govs. McDonnell and Martin O’Malley, a Democrat, jockey for economic development bragging rights. Virginia recently won a high-profile headquarters relocation for Northrop Grumman Corp., aided by up to $14 million in state grants and proximity to the Pentagon, its biggest customer. O’Malley shortly after rolled out a vast proposal to kick-start tech investment — dubbed InvestMaryland. The blueprint seeks to raise $100 million in venture capital by offering deferred tax credits to insurance companies that invest in Maryland VC funds. Biotech in Maryland saw a 26 percent drop in VC funding in the first quarter of 2010, according to the governor. O’Malley’s proposal will require legislative approval.
Former Gov. Robert Ehrlich, who is running against O’Malley, has unveiled a competing plan to promote entrepreneurship. He wants to cuts the state’s corporate income and sales taxes. SOURCE: Washington Business Journal