BUSINESS JOURNAL: Tax forces VCs to flee Portland

Portland Business Journal - April 13, 2007
by Aliza Earnshaw
Business Journal staff writer

A change of heart in Portland City Hall might lure venture capitalists back to Oregon's commercial center, but only if Multnomah County follows suit.

The Portland City Council is now working on an exemption to a tax on companies' net income, hoping to persuade venture capital firms to return to the city.

But unless Multnomah County enacts a similar exemption, it's unlikely that refugee investment firms, or new ones, will flock to Portland.
A combined 3.65 percent tax on investors' gains has caused all but a couple of local venture investment firms to locate outside the city limits and outside of Multnomah County. Once a VC firm sells a company and earns a return for its investors, it must pay city and county taxes on that gain, effectively reducing returns.

Firms such as OVP Venture Partners, Mt. Hood Equity Partners LP, Cascadia Partners LLC -- about to be renamed Reference Capital Management -- are all headquartered outside of Portland and Multnomah. Seed-stage fund Northwest Technology Ventures recently moved to Beaverton to escape the dual income taxes.

SmartForest Ventures has located its limited-partners entity -- the actual investment fund -- in Lake Oswego, where the Multnomah and Portland taxes don't apply. The entity that manages that fund is located in downtown Portland, and does pay the business income taxes. Capybara Ventures, a seed-stage investment fund that is located within SmartForest's downtown Portland offices, has stayed in Portland because "we are optimistic the city will change its tax structure," said Managing Partner Eric Rosenfeld.

If the city and county don't make a change, Capybara would either have to do what SmartForest did, or move entirely out of Portland, to honor its fiduciary responsibility to get the highest possible return for investors, Rosenfeld said. "It's hard to raise institutional venture capital in the only jurisdictions in the country that tax venture capital investors."

Portland and Multnomah County have long levied taxes on companies' net income, a practice that puts the region at odds with nearby cities and counties.

The tax does not apply to banks, private equity funds and other regulated investment firms. Those sectors are exempt. Not so for VC firms. That's unfair and inconsistent, say local venture capitalists. Adding insult to injury, venture capital firms that have offices in Portland but are headquartered elsewhere don't have to pay the tax.

Portland and Multnomah are "discriminating against their own," said Gordon Hoffman, managing director of Northwest Technology Ventures.

Beaverton charges a $50 yearly business fee, plus $8.50 per employee per year. Vancouver, Wash., charges $125 per year. Hillsboro, where chipmaking giant Intel Corp. has more than 16,000 employees, has an $80 fee, plus a per-employee fee capped at $830 per year. Portland's minimum fee, at $100 per year, is comparable to surrounding cities' fees.

But the tax on net income for companies above a certain revenue level means that some companies are liable for "hundreds of thousands of dollars" in city and county taxes, said Warren Jimenez, senior policy director for City Commissioner Sam Adams. "A small number of payers are paying the majority of the tax," he said.

A group of venture capitalists, tax lawyers and tax accountants took their case to Portland's City Council and seem to have been clearly heard.
"Alarm bells went off," said City Commissioner Dan Saltzman. "These are the types of businesses that should be in Portland." The capital they provide funds new companies and helps Portland's economy, Saltzman said.

"We are coming up with exemption language, to keep the VCs in Portland," said Jimenez, adding that there's "an appetite" among council members to retain and win back these firms.

However eager the City Council may be to welcome venture capitalists, an exemption will do no good unless Multnomah County enacts the same kind.
That could happen, and soon.

"If Portland does it, I guarantee you we will do it too," said Multnomah County Commissioner Jeff Cogen. County commissioners will vote next week to reduce county business taxes to benefit small companies. The Portland City Council already approved a similar change. Businesses in Portland with gross receipts of less than $50,000 no longer have to pay any business fee at all. Formerly, businesses with less than $25,000 were exempt. Owners of small businesses can now exempt $80,000 in annual compensation from their taxable revenue, up from $60,000. Portland's decision was made easier by a one-time, $30 million revenue surplus.

Though Multnomah is faced with a deficit this year, Cogen is confident the county commissioners will replicate Portland's changes, starting in 2008.
Though Portland will forgo about $3 million per year with its revised business tax, city commissioners think it's worth it, to keep small businesses in the city and encourage them to grow.

It's the same story with venture capital firms, said Saltzman.

"What about the impact on revenue? If they are gone, there's no revenue at all," he said.

Aearnshaw@bizjournals.com | 503-219-3433

EMAIL

Your Email: *

Your Name: *

Send To: *

Enter multiple addresses on separate lines or separate them with commas.

Message Subject: (Your Name) has forwarded a page to you from CommissionerSam.com

Message Body: (Your Name) thought you would like to see the CommissionerSam.com web site.

Your Personal Message: *