Looks like it’s the beginning of the end of the fight over increasing taxes on carried interest. The House of Representatives today passed “The Tax Extenders Act of 2009,” aka HR 4213. The bill contains a provision that would change the tax status of venture capital carried interest from capital gains to ordinary income, with the purpose of paying for year-end tax extensions.
“Increasing the taxes of long term investors whose commitment to building companies and creating jobs has been proven for decades is counter productive to the one goal on which our country should be focused – economic recovery,” Mark Heesen, president of the National Venture Capital Association, said in a statement. “The President and Congress have made it clear that to emerge from our financial troubles our country needs jobs and innovation. Taxing VCs who are working with fast growing start-up companies so that large corporations can continue to receive tax breaks is ill conceived policy.”
With the Dems in charge of both the House and Senate, plus a Democratic President, odds are that VCs will soon be paying the ordinary income rate on carried interest instead of the capital gains rate. The irony, of course, is that after a dearth of liquidity events over the past couple of years, we’ve recently seen some sizable exits that would provide actual carried interest to be taxed.
Merry Christmas, venture capitalists! –Love, Your Uncle Sam
HERE’S THE PRESS RELEASE FROM THE NVCA:
HOUSE OF REPRESENTATIVES PENALIZES JOB CREATORS TO PAY FOR YEAR END TAX EXTENSIONS
Hasty Passage of HR 4213 Significantly Compromises Venture Capital Role
in Reviving the Economy
December 10, 2009, Washington, D.C. – Today’s House passage of The Tax Extenders Act of 2009 HR 4213 will harm venture-backed job creation at a time when America is striving for economic recovery, according to the National Venture Capital Association (NVCA). The bill contains a provision which doubles the taxes on venture capitalists who build successful companies, significantly upsetting a risk/reward equilibrium that has been encouraging long term investment for decades. The purpose of the provision, which changes the tax status of venture capital carried interest from capital gains to ordinary income, is to pay for year-end tax extensions. The bill passed, despite opposition to using the carried interest provision voiced by a significant group of Members of Congress representing diverse districts across the country.
“Increasing the taxes of long term investors whose commitment to building companies and creating jobs has been proven for decades is counter productive to the one goal on which our country should be focused – economic recovery,” said Mark Heesen, president of the NVCA. “The President and Congress have made it clear that to emerge from our financial troubles our country needs jobs and innovation. Taxing VCs who are working with fast growing start-up companies so that large corporations can continue to receive tax breaks is ill conceived policy.”
The venture capital industry has a long history of job creation and innovation which has flourished under the existing tax code. According to HIS Global Insight, companies that were founded with venture capital today employ more than 12 million Americas and have revenues that equate to 21 percent of U.S. GDP. The investment model is characterized by its long term, high risk nature and is the type of investment that policy makers had in mind when enacting capital gains tax provisions. Raising taxes on carried interest, which is only earned when the venture capitalist creates a successful portfolio of companies, will risk discouraging this type of investment going forward.
The tax change will also impair investment in high tech industries that are critical to ongoing U.S. leadership including life sciences and clean tech. Both industries have become more capital intensive and longer term – many companies having investment time horizons of 10 years or more. With the venture industry poised to contract, continued investment in these areas is already at risk. A tax change could thwart innovation as investors are better rewarded overseas.
“If the government wants to support economic recovery, policymakers should not harm those communities that are best positioned to contribute to economic growth and increase employment,” said Heesen. “The House has compromised a business model that has set the U.S. economy apart for decades. It is our sincere hope that the Senate understands what is at stake and does not use carried interest for venture capital as a quick pay-for when they consider the tax extender package.”
About the National Venture Capital Association
The National Venture Capital Association (NVCA) represents more than 400 venture capital firms in the United States. NVCA’s mission is to foster greater understanding of the importance of venture capital to the U.S. economy and support entrepreneurial activity and innovation. According to a 2008 Global Insight study, venture-backed companies accounted for 12.1 million jobs and $2.9 trillion in revenue in the United States in 2008. The NVCA represents the public policy interests of the venture capital community, strives to maintain high professional standards, provides reliable industry data, sponsors professional development, and facilitates interaction among its members. For more information about the NVCA, please visit www.nvca.org.