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VENTURE CAPITAL GAINS TAX REDUCTION BILL FOR START-UPS

Executive Summary

VENTURE CAPITAL GAINS TAX REDUCTION BILL FOR START-UPS to be introduced by Rep. Matsui "within 30 days," the California Democrat said in a May 15 luncheon address to the Association of Biotechnology Companies' annual meeting in Washington, D.C. Matsui and Rep. Moody (D-Wis.) are preparing what is being called a "targeted capital gains" bill that would reduce the capital gains taxes owed by investors in small start-up firms. Sen. Bumpers (D- Ark.) reportedly is drafting a companion bill in the Senate. As currently envisioned, the proposal would reduce the tax liability on capital gains by 50% for stock investments held for five years or more. The credit would apply only to seed or venture capital investments. Matsui and Moody are still considering how to define "small" companies in terms of total investment funding and assets, but the bill will include a venture capital cap, above which investors in start-ups would not receive the 50% tax break. "We are hopeful that we will get some support for [the bill]," Matsui commented at the ABC luncheon. However, he added: "I don't expect it to happen this year." Matsui urged ABC to get involved in supporting the proposal. "What we need to do is to get a number of people talking about this so that we can gain some momentum for 1992." While not resolving all of small businesses' concerns about capital gains, the bill may be a stop-gap measure following the rejection of previous capital gains measures by Congress. Matsui noted that the Bush Administration's support of the issue has been waning, and that capital gains is not likely to be reintroduced either this year or in 1992. Observing that "many people now view the issue of capital gains as a rich/poor issue," Matsui said that Congress "must refocus this debate and talk about how the cost of capital must be reduced so that we can raise the standard of living of the average citizen." Matsui also discussed the R&D tax credits, which are scheduled to expire this year. He said that House Ways & Means Committee Chairman Rostenkowski (D-Ill.) and Sen. Bentsen (D-Tex.), chairman of the Senate Finance Committee, have indicated that there will be no action on taxes until September. However, Matsui predicted that renewal of the R&D tax credit along with 11 other tax provisions may be "difficult." Under the 1990 budget agreement, extension of the tax provisions would require Congress to find $ 2 bil. in revenues to pay for the R&D credit in fiscal 1992. "It could be a little more tenuous as to whether these provisions will in fact pass," he remarked. "It is very unlikely that we are going to get any kind of revenue increase to offset that $ 2 bil. loss."
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