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Council Votes To Drop Venture Capital Tax

Portland fancies itself the home of innovative dreamers willing to take risks.  That’s what venture capitalists do — invest in high risk start ups with the prospect of a big pay off later.

But the city of Portland has just one venture capital firm in Portland.  The reason lies in an obscure area of tax law.  And as Colin Fogarty reports, the Portland City council acted Wednesday to change it.

Taken together, business income taxes by the city of Portland and Multnomah County add up to 3.6 per cent.

When the city of Portland’s license and tax division manager Terri Williams sat before the city council to explain how venture capital funds get taxed, commissioner Randy Leonard stopped her.

Terri Williams:  "I’m going to try my very best to not get into the technical aspects and try to explain it very simply."

Randy Leonard:  "And I should tell you we have discussed it, so I think we understand what the issue is, so…."

Terri Williams:  "So should I stop now then?  (laughs)"

Randy Leonard:  "As of right now, you have the votes. (laughs)."

What Williams didn’t explain is that venture capital funds are similar to mutual funds, but they get taxed differently. 

Under federal rules, mutual funds are able to deduct money that passes through them.  So to the tax collectors in Portland and Multnomah County, those mutual funds look like they have little or no money.

Venture capitalists don’t have the same luxury.  When they liquidate, or have what’s known as an “exit event”, they have to pay local tax collectors a portion of a big windfall.  Except they don’t pay that tax because they’ve all left the city limits…all but one.

Bob Ward:  "I’m Bob Ward with Capybara Ventures.  Currently, we are the only venture firm based in Portland."

Ward says he too would have moved except his investments have yet to generate taxable income. He's one member of a city and county work group that studied what to do about the local business income taxes on firms like his.

The conclusion :  eliminate them.

Bob Ward: "It became clear that we were being treated differently from other forms of investment, other funds, like mutual funds.  Plus I think there’s also acknowledgement that venture capital can be a great economic driver."

Ward estimates that his company has brought in $60 million from out-of-state investors to seed small start-ups.

The idea of changing the tax law has been driven in part by Multnomah County commissioner Jeff Cogen and Portland city commissioner Sam Adams — who’s running for mayor.   Adams says the no money will be lost with this tax cut because venture capitalists have fled the city — and the only one left says he'd  move before he'd pay the tax.

Sam Adams: "We’re actually giving up nothing.  It’s only upside in terms of being able to attract jobs.  And when you talk to businesses, their number one, two, or three concern is access to working capital."

The Portland city Council voted to accept the work group’s report on taxing venture capital funds.  The county commission plans to do the same.  After that, the city’s Revenue Bureau — which also handles county business income taxes too — will make the change through an administrative rule.

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