The Wall Street Journal
By: Martin Vaughan
June 15, 2010
The U.S. House of Representatives approved legislation to eliminate capital-gains taxes on some small-business investments.
The House adopted the $3.5 billion in tax breaks on a 247-170 vote. The bill will be fused with a separate measure, which the House will vote on Wednesday, aimed at boosting lending to small firms, and then shipped to the Senate for consideration.
The House bill builds off proposals from President Barack Obama aimed at spurring investments in small business, and fits in with his recent theme of a helping hand for Main Street.
"This bill represents a continuation of our work to spur job creation and improve the quality of life in our communities," said Ways and Means Committee Chairman Sander M. Levin (D., Mich.).
But Rep. Dave Camp (R., Mich.), said that "while the tax relief in here is welcome, it is not enough and won't actually help small businesses create the jobs we need to reduce our stubbornly high unemployment rate."
The bill would provide a 100% exclusion from capital-gains taxes for certain small-business stock purchased between March 15, 2010, and Jan. 1, 2012. Current law allows investors to exclude 75% of income from such investments from capital-gains taxes.
The stock must be held for at least five years to qualify for the exclusion.
Before passing the small-business bill, the House defeated an amendment from Mr. Camp to repeal the requirement in the health-care law that Americans purchase health insurance. It failed on a 187-230 vote but drew support from 20 House Democrats.
The bill also includes a provision limiting the use of grantor-retained annuity trusts, a vehicle used by wealthy families to minimize estate taxes. Those limits would raise $5.3 billion for the Treasury over 10 years. The bill raises another $1.9 billion by barring paper producers from claiming a tax credit intended for producers of cellulosic biofuel.
The capital gains exclusion has been criticized because most small businesses won't benefit from it.
Only small firms organized as C corporations will benefit. Investments in service corporations like law, engineering or consulting firms, farms, hotels, restaurants or natural resource extraction businesses are not eligible.
Alan Viard, resident scholar at the American Enterprise Institute, said the multiple restrictions on the capital gains tax break made it "distortionary" and "inefficient."
"In order to benefit from this, you've got to search out a corporation, to buy the stock at original issue, and hold on to it for five years," Mr. Viard said. "This is a pretty unambiguous thing to condemn."