The repeal of Wisconsin’s capital gains tax exclusion will hurt state efforts to increase the number of investors, companies and jobs in tech-based industries, two leaders of the Wisconsin Technology Council said Thursday.

Tech Council Board Chairman Mark Bugher and President Tom Still said the Senate’s decision to eliminate Wisconsin’s 60 percent tax exclusion on investments held more than a year will discourage investment in all sectors, but particularly in tech-based industries that have been creating a significant share of Wisconsin’s new companies and jobs.

If the budget decision stands and is not vetoed by Gov. Jim Doyle, it would cost investors $485 million over two years. Doyle had proposed reducing the current state exclusion from 60 percent to 40 percent, which matches the federal tax break. Doyle’s plan would have cost investors $170 million over the next two years; the Senate plan would cost them an additional $315 million.

“It makes little sense to remove incentives to invest in Wisconsin’s economy, particularly at a time when the state needs more start-up activity,” said Bugher, who is director of University Research Park and a former state Administration and Revenue secretary.

“Members of the Tech Council, through our board’s white paper reports to the governor and the Legislature, have consistently urged an expansion of Wisconsin’s capital gains tax exclusion as a way of keeping investors’ dollars in the state and attracting co-investment dollars from elsewhere. This vote moves Wisconsin in the opposite direction,” Still said.

Bugher noted that eliminating the capital gains exclusion stands at odds with other economic development efforts by the governor and the Legislature, including the recent expansion of investor tax credits for investors in certain high-tech companies.

Eliminating the tax break will also hurt existing small-business owners, for whom the capital gains exclusion is crucial when it comes time to sell their businesses as they near retirement.

“This is not a tax on the wealthy, as some might imagine, but a tax on current small business owners and those who want to build small businesses,” Still said.

The Tech Council is the independent, non-profit science and technology adviser to the governor and the Legislature. It has membership chapters in Milwaukee, Madison, Northeast Wisconsin, Central Wisconsin, the Lake Superior region and Western Wisconsin.

Read a Legislative Fiscal Bureau summary of the Senate proposal below:

[LFB Paper 357]
Governor/Joint Finance: Authorize claimants to subtract from federal adjusted gross income any amount, up to $10 million, of a long-term capital gain if the claimant: (a) deposits the gain into a segregated account in a financial institution; (b) invests all of the proceeds in the account in a qualified new business venture within 180 days of the sale of the asset generating the gain; and (c) notifies the Department of Revenue (DOR) that the capital gain has been reinvested and, therefore, will not be declared on the claimant’s income tax return. The notification would be made on a DOR form accompanying the claimant’s income tax return for
the year to which the claim relates. Specify that the basis for the investment in the new business venture would be calculated by subtracting the initial gain from the investment. Prohibit a
claimant from using the initial gain to net capital gains and losses as otherwise allowed under current law. (State law limits the amount of capital losses that may be used to offset ordinary
income to $500 annually, with the remainder carried over to future years.) Define “claimant” as an individual; an individual partner or member of a partnership, limited liability company (LLC), or limited liability partnership; or an individual shareholder of a tax-option corporation. Define “long-term capital gain” as the gain realized from the sale of any capital asset held more than one year that is treated as a long-term gain under the Internal Revenue Code (IRC). Require the Department of Commerce to implement a program to certify qualified new business ventures, and authorize Commerce to certify businesses as such if they are engaged in: (a) developing a new product or business process; or (b) manufacturing, agriculture, or processing or assembling products and conducting research and development. Specify that a business desiring certification must submit an application to Commerce in each taxable year for which certification is desired. Prohibit Commerce from certifying businesses that are engaged in real estate development; insurance; banking; lending; lobbying; political consultation; professional services provided by attorneys, accountants, business consultants, physicians, or health care consultants; wholesale or retail sales; leisure; hospitality; transportation; or construction. Require Commerce to maintain a list of certified businesses, to permit public access to the lists through its Internet Web site, to notify DOR of every certification it issues, and to notify DOR of the dates on which certifications are revoked or expire. The new tax deferral would first apply for tax years beginning after December 31, 2010, so no fiscal effect is estimated for the 2009-11 biennium. The administration estimates that the proposal would reduce individual income tax collections by approximately $14,000,000 annually in the 2011-13 biennium.