Tax change would cloud Florida's recovery

Few states have borne the brunt of this devastating recession more than Florida. With high unemployment and the construction and real estate markets in tatters, Floridians are understandably worried about our economic future.

Florida's budding venture capital ecosystem can provide a ray of sunshine in an otherwise dismal forecast. The state Legislature and numerous localities have worked tirelessly over the last decade to bring more venture capital to Florida, and these efforts are bearing fruit.

Venture capital firms have invested more than half-a-billion dollars into private, early-stage growth companies in our state since 2005. These dollars are helping entrepreneurs build businesses in innovative areas such as software, alternative energy and life sciences. According to IHS Global Insight, companies headquartered in Florida that were fueled by venture capital investments have accounted for more than 240,000 jobs.

Even more encouraging, Florida's venture activity stretches across the state - from Jacksonville to Tampa to Orlando to Palm Beach. This decentralization of growth equity capital, which is uncommon in other states, means that the venture industry's continued growth will create more jobs statewide, rather than in only one or two regions.

Unfortunately, storm clouds have begun to gather, as the U.S. House passed a bill (HR 4213) last week that threatens to further darken the forecast for Florida's recovery. Cobbled together hastily to pay for a one-year extension of various tax credits, HR 4213 would increase taxes up to 133 percent on venture capitalists by reclassifying their carried interest (the profits they share in if they help build successful companies) from capital gains to ordinary income.

The provision in the House bill is no doubt motivated in part by a sense of fiscal responsibility to cover the cost of the tax extenders package. The problem is that the legislation as currently written ensnares venture capital funds, and as a result it will significantly hamper investment in our most promising companies and the jobs they generate in Florida and throughout the country - just when we need them most.

Here's why. Due to the high risks and long-time horizons involved in building companies from inception to large and successful businesses, venture capital remains one of the only sources of funding for America's most ingenious entrepreneurs and innovative early-stage companies.

For both entrepreneurs and venture capitalists, the potential rewards are great, but the risks of failure are substantial - which is why Congress for decades has provided the incentive of taxing carried interest at the long-term, capital gains rate. In order to commit to years of hard work and bear the risk of building early-stage companies, the reward needs to be commensurate with that risk.

With this carefully calibrated ratio of risk to reward, the venture capital industry has powered America's economic growth for decades. Today, companies with venture capital roots employ more than 12 million Americans and generate revenues equal to 21 percent of the U.S. gross domestic product.

By taxing carried interest as ordinary income, however, Congress will remove a major element of that reward, and these diminished incentives will particularly discourage the formation of the small venture capital funds that invest in early stage companies.

Those venture firms that do continue will likely seek shorter investment horizons and shift investments to larger, more established companies to help mitigate the risk of investment losses and rebalance the risk-reward ratio. That shift ultimately shrinks the innovation pipeline, because many promising early-stage companies simply won't get funded. The result is fewer jobs created and fewer technological advances to spur new growth industries. This would be disastrous for Florida, which desperately needs these types of companies to broaden its economic base and be positioned for future growth.

That's why Sens. Bill Nelson and George LeMieux must work on behalf of Florida's entrepreneurial community to remove the carried interest provision from the House tax extender bill when it reaches the U.S. Senate. By doing so, they will preserve a tax structure that is clearly working in creating high-quality jobs in Florida and represents a true ray of hope in the state's recovery.