In many states, advocates of cutting taxes on capital gains (profits from sales of business assets) have claimed lower rates would increase the flow of venture capital and so clear the pathway to rapid economic growth.
Hoping to cash out quickly with big capital gains, venture capitalists provide critical large scale financing to technology startups that most states see as crucial to high-wage economic growth. But the distribution of venture capital investment has remained lopsided, with 60% going to California and metropolitan Boston. Lower tax rates on venture capital gains in other states would supposedly make the playing field more even.
But this theory may stumble over some hard facts from a new analysis by the Oregon Center for Public Policy (OCPP). It reveals that while continuing to tax capital gains at the same rate as other income, Oregon has seen its venture capital investments double within a year, rising from $153 million in 2006 to $302 million last year.
OCPP’s analysis of data from PricewaterhouseCoopers and the National Venture Capital Association report found that in 2007 Oregon ranked 9th among states for venture capital investment per capita, up from 19th place the previous year. Oregon’s per capita venture capital investment in 2007 was at least double that of 32 other states. In addition, the top states for venture capital, Massachusetts and California, also tax capital gains as much or more than ordinary income.
OCPP policy analyst Michael Leachman cites research universities, and easy access to markets and suppliers, as bigger lures to venture capital: “There’s a reason why venture capital gravitates toward places like Boston and Silicon Valley, and it’s certainly not the tax rate on income from capital gains.”
In fact, as Leachman notes, tax breaks that reduce revenue available for investment in research and public infrastructure could even reduce venture capital investment. Hopefully, this message will encourage other states, most of which still tax capital gains like ordinary income, to hold the line.