Investments show no need to give capital gains income favored tax status

Oregon’s venture capital more than doubled last year, far outpacing the national growth rate of investment money, according to new analysis by the Oregon Center for Public Policy.

Venture capital in Oregon rose from $91 million in 2009 to $196 million in 2010, OCPP found upon analyzing data from the MoneyTreeTM Report by PricewaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Financial.

While Oregon’s venture capital jumped 115 percent last year, investments nationwide went up 20 percent, according to OCPP.

“Oregon holds its own in attracting venture capital,” said OCPP executive director Chuck Sheketoff. “With investment money already flowing to Oregon entrepreneurs, it makes no sense to take money away from schools, public safety and health care and other human services to give capital gains income favored tax status.”

Over time, the flow of venture capital into Oregon has closely mirrored the pattern of investment nationally, generally rising and falling in tandem, according to OCPP.

On a per capita basis, Oregon’s venture capital ranked 15th highest among all states and the District of Columbia in 2010. That was better than its per capita rank in 2009 (22nd) and better than the average per capita rank of 18th over the previous 15-year period, from 1995 through 2009.

The Competitive Index, a joint publication of the Oregon Business Council (OBC) and the now-defunct Oregon Progress Board and prepared for the OBC’s Oregon Business Plan, used to cite both total and per capita venture capital as measures of the state’s “pioneering innovation.” Although the Competitive Index has not been published since 2007, OCPP’s analysis updates the figures for total and per capita venture capital.

Sheketoff noted that Oregon’s strong performance in 2010 occurred not only in the absence of favored tax treatment for capital gains income, but also with voter-enacted higher income tax rates on wealthy investors in effect, referring to Measure 66.

“Tax rates are at best a minor factor in investment decisions,” said Sheketoff. “Our business climate for venture capital investment is measured by many other factors, such as the quality of our schools, the knowledge and skills of our workforce and the quality of life for our entrepreneurs.”

Despite Oregon’s relatively strong performance in attracting venture capital, OBC is lobbying the legislature to cut the income tax on capital gains, claiming that it will help attract funding for entrepreneurs. In its lobbying efforts, OBC cites a report that gave Oregon a low “business tax climate” rank due to Oregon’s current income tax rates.

But as Sheketoff noted, the report cited by OBC ranked venture capital-poor South Dakota as the state with the lowest taxes for small businesses.

“In 2010, South Dakota, OBC’s model for good tax policy, ranked last in venture capital, with no investment coming in that year,” said Sheketoff.

The states that ranked first and second in terms of per capita venture capital in 2010, respectively, were Massachusetts and California. Both of those states, said Sheketoff, tax the income from capital gains at the same rate, or higher, as income from work.

“Treating all income, whether it’s from the sweat of one’s brow or from risky investments, alike for tax purposes is not only eminently fair,” said Sheketoff, “it’s also no impediment to venture capital investment.”

What makes Massachusetts and California attractive to venture capital is not their tax rates, but factors such as their top-tier research universities and proximity to markets and suppliers, according to Sheketoff.

“If we aspire to join the states in the top ranks of venture capital, we will need to invest more in our research universities and other public structures that make the state attractive to investors,” he said. “The loss of revenue from giving capital gains income favored tax status would make it harder to fund those vital and business-friendly public investments.”