By Brian Clark
WisBusiness.com
Wisconsin would be unique in the Midwest if the Legislature approves a plan by Gov. Jim Doyle that would allow some Wisconsin investors to defer paying capital gains taxes if they reinvest their profits in Badger State start-ups, advocates say.
The proposal, which is part of Doyle’s Accelerate Wisconsin plan, builds on Act 255 — a 4-year-old bipartisan program to stimulate investment in young, high-tech companies — and is not modeled on any other state, said Lee Sensenbrenner, a Doyle spokesman.
Bert Waisenen, an analyst with the National Conference of State Legislatures in Denver, said many states have angel investor income tax credits against cash put into a new business in a state. But a review showed only Vermont had tax breaks for capital gains reinvested in young companies; Vermont enacted its version last year.
“Both income tax credits and capital gains preferences focus on the same goal of encouraging angel investment, but in different ways,” he said.
Doyle’s proposal would permit individuals, partnerships and limited liability companies to avoid paying tax on up to $10 million of their capital gains if they use them to fund qualifying young businesses in the state.
Sensenbrenner said Wisconsin is leading in its efforts to boost start-up businesses, promote reinvestment of capital gains and expand angel and venture capital investment.
Though the initiative is aimed in part at high-tech companies – of which Madison has many – he said other young firms could qualify.
“They don’t have to be exclusively high-tech,” he said. Some of the other criteria include being headquartered in Wisconsin, having fewer than 500 employees, not being publicly traded, having 75 percent of the workforce in Wisconsin and being less than 7 years old, he noted.
“This is about giving companies that want to grow more opportunity to do so,” he said.
Sen. Ted Kanavas, an architect of Act 255, agreed that Wisconsin would “be ahead of the pack” if Doyle’s proposal becomes law. The Brookfield Republican lauded Doyle for his proposal, which he said is similar to AB 671, a bill authored by Kanavas and Rep. Pat Strachota, R-West Bend.
“I am glad the governor has joined us in working to get more favorable treatment for Wisconsinites when it comes to reducing capital gains taxes,” Kanavas said.
“We need to create a better tax climate here and I’m excited to get this closer to the finish line,” he said.
Though Republicans have generally praised the Doyle plan, Senate Majority Leader Russ Decker, D-Weston, has yet to endorse it. Decker spokeswoman Carrie Lynch said he wants to see more details and know what it would cost the state.
Sensenbrenner said Doyle analysts believe the state would gain tax revenue because it would spark new investment in growing companies. He said Act 255 tax credits have leveraged $39 million in private investment from angel and venture investors.
By 2015, Accelerate Wisconsin tax credits would reach $100 million and are expected to leverage a minimum of $400 million in private investment, he said.
Stan Babicz, a CPA and tax planning expert with Grant Thornton in Milwaukee, said credits and incentives for start-ups vary widely around the Midwest, with some focused on helping companies in specific, depressed areas.
Babicz said he did not know if other states were launching similar efforts, but he praised the Doyle plan regardless.
“It’s a great idea,” he said. “Wisconsin’s taxes are generally higher than its neighbors, so any inducement to boost start-up companies is attractive.
“My clients tell me their Wisconsin workforce is so loyal and dedicated and that they want to start and grow their businesses here. But they need capital to do that. This is a great way to encourage that investment.”
Tom Still, president of the Wisconsin Technology Council, said he, too, is “very supportive” of Doyle’s plan because it would encourage new investment in qualified start-up Wisconsin companies.
“This capital gains tax exclusion is consistent with what we have said in our last three white papers,” he said. “It’s an important way to way to make available a source of capital that might not stay in state.
“People who have capital gains have a lot of opportunities to invest,” he said. “If we can encourage them to invest here, they might consider it.”
Still said the plan would “democratize private equity.”
“Now there is a relatively small circle of people who invest through private equity angel and venture capital groups. This will allow a whole new set of people who have a high net worth to invest.
“They might be risk-takers, but never thought they were quite big enough to do this. Now they would be and this would help the Wisconsin economy.”
Mark Bugher, director of Madison’s University Research Park and a former Revenue Secretary under former governor Tommy Thompson, lauded Doyle’s plan to spur more investment in young firms.
Bugher said he supports an overall capital gains cut tax. But in lieu of that broad a measure, he said the Doyle plan is a good idea and fairly unusual.
“We talk a lot in Wisconsin about getting investment dollars in early-stage companies,” he said. “And this provides a whole new array of financing for those firms. It provides an additional incentive for those with assets to make the investment and defer the gain.
“I hope a lot of that money will go into high-tech and science-based companies,” he said. “That is clearly one of the goals of this proposal.”
