Ending the Bias Against Venture Capital Firms: A Step Forward for Local Economic Development
Yesterday Jeff Cogen wrapped up a successful effort to make Multnomah County a viable place for venture capital firms to locate. An oversight in the Business Income Tax (BIT) code had caused all local venture capital funds to move outside of Multnomah County and the City of Portland's taxing jurisdiction. For them to stick around here meant subjecting capital returns on investment that they deliver to their shareholders (limited partners) to the city and county business income taxes.
To subject returns on capital to those taxes would have made local venture funds both uncompetitive and likely targets of shareholder lawsuits, so they moved (at least any with taxable income to report). The solution Commissioner Cogen developed in close collaboration with Commissioner Sam Adam's office, the Revenue Bureau, and a workgroup comprised of members of the venture capital industry, will level the playing field by giving venture capital firms the same tax treatment mutual funds get.
We have removed an inequity, and done so with zero impact to the city or county budget. We have also done so in a manner that preserves fairness and integrity in the tax system and avoids unintended consequences. There may even be some economic development upside to this change. Commissioner Adam's office and the Portland Development Commission (PDC) plan to track the future impacts of this change using an online benchmarking survey. Since venture capital plays a vital role in today's global economy by nurturing emerging businesses and helping their innovative ideas and technologies achieve market success, Commissioners Cogen and Adams felt it was very important to address this problem. Unanimous votes in favor of the change at both the county and city indicated the broad support this solution had. Click below to see three recent media pieces on this.
Recent stories on local venture capital and this tax issue.
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and also see the joint press release sent out by Commissioner Cogen and Commissioner Adams:
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11/28/07
For Immediate Release:
Venture Capital Tax Change to Take Effect Following Hearings
Administrative Rule 110.07-1: Diversified Investing Fund Deduction.
Contact: Warren Fish – 503-988-5219
Kimberly Schneider – 503-823-4541
Portland City Council and the Multnomah County Board of Commissioners will consider approval of a new administrative rule that will address the tax treatment of venture capital funds. The City Council hearing will take place Wednesday, November 28 at 10:15 a.m.; the County Board hearing will happen Thursday, November 29 at 9:30 a.m.
After listening carefully to complaints from local venture capital firms during hearings on reform to the Business License Fee in April of 2007, the Revenue Bureau, City Commissioner Sam Adams’ Office and County Commissioner Jeff Cogen’s Office put together a workgroup that included representatives from the venture capital industry, tax professionals and city and county representatives. This workgroup was tasked to review the tax treatment of venture capital funds. If venture capital funds were found to be disadvantaged in Portland and Multnomah County, the group was to jointly design a solution that would overcome this disadvantage without creating unintended consequences for the Revenue Bureau or other businesses.
The workgroup determined that it was appropriate to treat venture capital, mutual funds and all diversified investment funds alike under the local Business License Fee and Business Income Tax. It was not the goal to create a more favorable tax treatment for any particular type of fund or business. The final administrative rule reflects consensus on the best way to ensure that discussions of tax treatment have been answered for all parties.
In considering the group’s efforts, Commissioner Adams said, “The workgroup found a sensible, equitable solution. I see this as a great example of problem solving through public/private dialogue and collaboration. I hope the process and the outcome send a welcoming message to investors and local businesses they might support.”
Commissioner Cogen said, "Portland and Multnomah County have been discouraging venture capital firms from locating here for too long. A flaw in our local business tax structure caused local firms to headquarter outside of our City and County. This reform levels the playing field and welcomes them back."
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During the public hearing on this at the Multnomah County Boardroom yesterday we heard testimony from two members of the workgroup, both of whom applauded the process they took part in and the results. And at City Hall on Wednesday, two other members of the workgroup heralded the importance of this change for the future and shared their thoughts on the experience of working in parterhsip with local government on a problem that stood unaddressed for too long.
Posted on November 30, 2007
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