Wednesday, February 17, 2010

Small businesses need tax breaks


House Bill 479, the Idaho Small Business Venture Capital Investment and Jobs Act, was introduced last week in the House killing grounds, otherwise known as the Revenue and Tax Committee. Amazingly, it was printed. Since then it has already gone through several revisions designed to clarify its scope. However, both the original and subsequent versions are designed to achieve the same goal—to attract investment capital to Idaho small business ventures. Given the inherent high risk associated with startup enterprises, conventional lending sources such as commercial banks, both state and national, cannot participate in their funding.

This leaves the budding entrepreneur with FFF sources, angel investors or venture capital firms. In the trade, FFF (family, friends and fools) usually are the first source. Angel investors, normally individuals with deep pockets and expertise in their niche industry, are the second tier. At the top of the investment food chain are the professional venture capital firms, with bigger purses and more extensive management expertise.

This bill offers these risk-takers a sweetener in the form of a tax credit on any capital gain they may realize on their equity investment. However the eligibility criteria are tightly hedged. The Idaho business must have 20 or fewer employees, the 50 percent credit can be applied only to capital gains realized from the equity investment, and the investment window extends for only five tax years. In effect, the credit can only be realized if the ownership interest itself can be resold at a gain. It is rare to see that happen under the best of circumstances, given the high-risk nature of venture capital investments. If, as the Mountain Express' Feb. 10 editorial states, these small startups were indeed "sure-fire entrepreneurial startup companies, whose innovations eventually explode into mega-million or mega-billion giants," there would be no need for this bill. For that matter, there would be no need for venture capitalists, since "sure-fire" deals could readily attract funds elsewhere (and a lot cheaper).

The reality is otherwise. If the bill helps create only one successful homegrown Idaho enterprise with homegrown Idaho jobs, it will, in my opinion, have been well worth it. Turning the current economy around will happen when and if we create more good jobs at the local level. Hunkering down and waiting for someone else to do it for us is not my idea of leadership.

Rep. Bill Killen, D-Boise, represents District 17 in the Idaho House of Representatives.

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