Friday, April 1, 2011

Oregon’s ‘Devil Tax Credit’—A Road Paved With Good Intentions?

With all the attention that people have been paying lately to the adoption of state angel tax credits designed to spur entrepreneurial funding and growth, I’m surprised that the recent tax incentives proposed by the state of Oregon haven’t received more attention.

For those who missed it, the Oregon House of Representatives has adopted measures designed to attract large “800-pound gorillas” to move their corporate headquarters and workforces to the state.

In supporting the proposed legislation, Lirpa Sloof, an official with the Oregon Business Development Department, said: “While it’s true that small businesses are responsible for creating over 75% of all new jobs, we think that big business deserves some attention, too. With everyone else fighting for those new entrepreneurial ventures, it seemed like a good opportunity to address a less competitive landscape. We think this legislation is a good start and will be healthy for Oregon.”

As background, angel tax credits typically provide tax incentives for individuals to invest in new (usually high technology) companies. The goal of these credits is to spur investment and create more available capital for fledgling enterprises that desperately need access to capital to keep their entrepreneurial dreams alive.

The measures proposed in Oregon, which seem likely to have a chilling effect on entrepreneurship, apply to large companies (over 1,000 employees) who have both their corporate headquarters and at least 1/3 of their total workforce in Oregon. Key components of the legislation include:

1. A 33% credit for all money spent in defense of antitrust litigation

2. A whopping 40% “litigation tax credit” of all amounts spent:

  • Defending antitrust litigation

  • Pursuing protection for large patent and trademark portfolios (in excess of the first 25 patents or trademarks filed annually)

  • Enforcing non-compete agreements against former employees

3. A 15% tax credit for individual employees on any purchases they make of on-site amenities (e.g., day care, dry cleaning, postage, and even your favorite latte)

Entrepreneurs from around the country have vowed to keep a close eye on this legislation as it works its way through the Oregon Legislature. Entrepreneurial attorneys have even vowed constitutional challenges to “state sponsored support for illegal activity” under applicable antitrust laws.

Bill Gates, chairman of Microsoft, which is headquartered in Oregon’s neighboring state of Washingon, commented that “while a move might be a little disruptive to some of our employees, the array of credits is pretty intriguing. It could increase company share value and my net worth enough to provide me and my foundation with additional resources to do more important work in Africa and other underdeveloped areas.”

I’m sure the growth and enormous economic impact of companies (like Google) in neighboring states has a lot to do with it, but these measures sure look like “Devil Tax Credits” to me. If large companies are encouraged to pursue excessively aggressive litigation and intellectual property protection, along with engaging in predatory pricing and other anti-competitive practices, the death of emerging high tech business enterprises can’t be far behind. If other states follow suit, we may all be headed to the fiery place where the “road to good intentions” often leads…

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