Source: Public Asset Institute, Montpelier, 3/20/2009Capital Gains 40% Exclusion Comments to the Senate Finance Committeeby Daniel Cunningham. Burlington, Vermont, entrepreneur.Thank you for having me here today. The last time I testified in front of a committee here was when I was a senior in high school, and the issue was the designation of the Vermont state rock in Act 221. I can assure you I am more excited to talk finance today than geology.I grew up in Bennington, attended Mount Anthony, and studied computer science in college. While an undergraduate I started a company that eventually merged into Bluemountain.com, which with just a handful of employees became the 8th largest site on the Internet in 1999. I founded a chocolate company which I still run today, called Dan’s Chocolates, and I co-founded a social networking company that grew to 34 million members and was the leader in social networking in South Africa, Indonesia, and India, as well as other countries. I moved back to Vermont in 2005, solely because I love the state. For me, it was a move based on emotion. And I convinced my wife from New Orleans that the weather here wasn’t too different from Louisiana.Our nation has seen a tremendous reduction in capital gains taxation in the past eight years. As federal capital gains rates have been lowered, my job has gotten easier. An entrepreneur, by definition, is someone who moves capital to havens of higher return. We upset existing industries and companies by finding efficiencies and generating higher yields.A disturbing trend has emerged nationally, however. Capital is favored so greatly over labor in the tax code that a semi-permanent aristocracy has formed. Investors making hundreds of millions of dollars a year are paying lower marginal tax rates than factory workers. Much is wrong both economically and ethically in the federal capital gains tax code, many businesspeople from Warren Buffett on down agree. Including me.So why, given this outlook of mine, am I here to argue the opposite? The State of Vermont faces a very different issue than the federal government: namely, competition. As a state, we must compete against other states. Entrepreneurs, especially those in high-yield fields like software, consumer brands, or finance, can live and work almost anywhere today. And we want these entrepreneurs in Vermont, as their businesses need few public resources, have small environmental footprints, grow exports quickly, and create high-paying career-level jobs.Entrepreneurs take huge economic risks that no one else will shoulder for the promise of recognizing capital gains. Often this means forgoing salary for years. Hence we pay close attention to taxation in this area. With one quick web search, a table of comparative tax rates is delivered to anyone who wants to view the tax offerings from every state in the union (1). As information becomes easy to access, entrepreneurs can maximize their location decisions without hiring consultants or lawyers it only takes a few minutes to decide where you should move your business.When I informed businesspeople in Boston that I was moving back to Vermont, they would often make jokes about how I had managed to find a state that taxed more than Massachusetts. In Vermont, the problem we face is not only that we have some of the highest property, income, and corporate taxes in the country, but that this fact has been burned into the state’s brand. Businesspeople and entrepreneurs associate Vermont with high taxation. The only tax we offer that is somewhat competitive is the capital gains tax with the 40% exclusion. It is not good policy, nor is it good business, to terminate our one area of strength.As a government, I suspect you would raise far more revenue if you keep the capital gains tax where it is, rather than raising it. In fact, if you lowered it to, say, the level of Colorado, at 4.63%, you likely would make more still, due to the economics of the Laffer Curve. You will have an army of entrepreneurs trying to work for you, generating both capital gains tax income and more jobs, instead of working against you and leaving the state, or never arriving, because they feel slighted. We need entrepreneurs to move here the base of those of us who live here or grew up here is too small to create the needed job growth.My recommendation is to be competitive in the capital gains tax rate, and let entrepreneurs know. We will tell each other, we will find the information via ads and web searches and Internet forums, and over time, you will have people clamoring to get here. The Boulder, Colorado area is experiencing tremendous career-level job growth as entrepreneurs and businesses flee high-tax California to enjoy low tax rates in a progressive area. We can do the same.Entrepreneurs and businesspeople are the lifeblood of job creation. We should not be placed in the same category as those who inherit money or move to Vermont because they are done with their New York finance or legal careers. We are here to build businesses, products, and jobs. But we are also a competitive bunch, and the State of Vermont needs to recognize its competitive position. I ask you, in the name of all entrepreneurs in the Green Mountain State too overworked and disorganized to form a trade group, to keep the 40% capital gains exclusion in place.Whatever you decide, I would like to thank you for your service to Vermont, and for the opportunity to speak to you today. The ability to speak directly to one’s government truly is a cherished freedom.Daniel Cunningham. Burlington. 4/8/08 The Vermont Legislature is considering closing the capital gains loophole to help offset the state’s General Fund budget deficit. Here are two opinions on that issue currently being considered by the Vermont Legislature. Legislators already have closed a loophole in the business carry forward tax loss area, where a company cannot move into Vermont anymore and recognize a state-level tax loss from previous years that was incurred elsewhere.Repealing Vermont’s Capital Gains Tax Break Would Ease Budget Woes and Improve Tax FairnessA new report released today by the Institute on Taxation and Economic Policy (ITEP) finds that Vermont could save upwards of $35 million per year if it were to repeal the tax break the state currently offers for income from capital gains. According to the report, A Capital Idea, Vermont is one of just nine states to grant preferential tax treatment to capital gains income. Together, those states will lose more than $660 million in 2008 from such policies.”Vermont’s capital gains exclusion deprives the state of millions of dollars in needed funds, benefits almost exclusively the very wealthiest members of our communities, and fails to promote economic growth,” said Paul Cillo, Executive Director of the Public Assets Institute.Jeff McLynch, ITEP’s Northeast Regional Director and one of the authors of the report, added, “Right now, legislators from Rhode Island to Hawaii are searching for solutions to mounting budget deficits, solutions that will allow them to fund vital public services without placing additional responsibilities on those families struggling to make ends meet. Repealing costly, inequitable, and ineffective tax breaks like Vermont’s capital gains exclusion are the first place they should look.”In practice, very few working class Vermonters have capital gains income that is subject to taxation. As the report notes, taxpayers with adjusted gross incomes (AGI) of less than $50,000 comprised 69 percent of all federal returns filed by Vermonters in 2006, but constituted just 14 percent of returns with income from capital gains. In fact, taxpayers in this income group received just 5 percent of total capital gains income reported by Vermonters on their federal tax returns that year.Gov. Jim Douglas has called for repeal of the capital gains exclusion.”[A] working man or woman in Vermont making $50,000 a year pays nearly 50 percent more tax than someone who does not work and simply lives off investment or trust fund capital gains income in the same amount,” Douglas said in his 2008 State of State Address.”Our state is one of only a few that has such an unfair penalty for doing an honest day’s work. This is grossly unfair. We must close this loophole and eliminate this working tax penalty.”In early 2008, the governor proposed using the additional tax revenue from repeal of the capital gains exclusion to reduce tax rates on people in the higher tax brackets. Since then, however, Vermont has suffered a sharp drop in General Fund revenue, and the governor has recommended using property taxes to cover general state spending. Ending the “working tax penalty” would be a fairer way to close the General Fund budget gap.A Capital Idea finds that the impact of repealing Vermont’s capital gains tax break would fall almost exclusively on the most affluent state residents. More specifically, 75 percent of the additional tax revenue generated by repeal would be paid by the richest 1 percent of taxpayers in Vermont families and individuals with incomes over $369,700 in 2008. Said McLynch, “Vermont lawmakers face a clear choice: keep in place a tax break that largely benefits the wealthy few or repeal that tax break and fund the investments in education and infrastructure that will speed economic recovery.”Public Assets Institute is a nonprofit, nonpartisan organization that promotes sound budget and tax policies to benefit all Vermonters. Additional information is available at www.publicassets.org(link is external).Based in Washington, DC, the Institute on Taxation and Economic Policy is a non-profit, non-partisan research organization that seeks to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. Copies of A Capital Idea, including detailed estimates of the impact repealing capital gains tax breaks would have in each of the nine states highlighted in the report, are available at www.itepnet.org(link is external).