WASHINGTON : Finally, a Capital Gains Break Democrats Like

Capital gains tax reductions. Wasn’t that a Republican club?

Now half of the Senate Democrats, and some of their GOP brethren, are supporting a proposal (SB 132) by Sen. Dale Bumpers (D-Ark.) to reduce the capital gains tax rate on long-term investments in small-business ventures.

In the House, Rep. Robert T. Matsui (D-Sacramento) has introduced an identical bill (HR 3741) with 38 co-sponsors.

President Bush’s capital gains proposals would apply more broadly to existing assets held for a short time.

The Matsui and Bumpers bills, known as the Enterprise Capital Formation Act, target new, long-term investments in high-risk small businesses.

To qualify for the incentive, investments would have to be held at least five years.

Administration proposals have drawn fire from Democrats for being unduly favorable to the wealthy.

In contrast, the Democrats believe that, by targeting smaller businesses, the Bumpers-Matsui bill would have a greater chance of reaching the middle class.

“This venture capital incentive will help create the technology, markets and jobs America needs to put us back on the road to economic growth and competitiveness,” Bumpers said. “Because it focuses on long-term investments in small firms, it will stimulate the growth of the companies that are suffering the most from the current credit crunch.”

The legislation would establish two categories for participation in the incentives:

* For investments in firms with $100 million or less in capital, the bill would provide a 50% tax reduction. That would set the capital gains tax at 14% for taxpayers in the 28% personal tax bracket and 7.5% for those in the 15% bracket. The stock would have to be held for at least five years.

* For investments in firms with $5 million or less in capital, rates would be reduced further, based on a sliding scale of up to 100% for stock held for 10 years or more.

The incentives would be available only for stock purchased directly from the company, not for stock traded on a secondary market.

In addition, the bill has been designed to cover only new stock. Companies would not be allowed to redeem existing stock to issue new, qualifying shares.

Emerging businesses, Matsui said, are “the engine that can drive our economy.”

Not surprisingly, the plan has received enthusiastic support from small-business groups, such as the National Federation of Independent Business, the National Venture Capital Assn., the Small Business Legislative Council.

“This legislation rewards those who are willing to make long-term investments, not those looking for a quick profit,” said John J. Motley, vice president of federation.

The measure would cost an estimated $900 million in lost tax revenue over a five-year period, compared to costs of more than $10 billion associated with the Administration’s latest version of its capital gains reduction plan.

House Bill Would Curb Partnership Abuses

Ignoring objections from the Bush Administration and the Securities and Exchange Commission, the House has voted to approve legislation designed to curb abuses in the limited-partnership industry.

The new rules are for a popular new investment vehicle known as a roll-up.

In a roll-up, several limited partnerships are merged into a single investment that can be traded publicly on an exchange.

Congressional hearings last summer uncovered evidence that roll-ups generally result in a financial loss for limited partners while general partners--the day-to-day managers--and their lawyers and accountants can pick up big fees from the merger process.

Limited partners have had few protections, and they are usually required to go along with a roll-up when it is approved by a majority of the limited partners.

Now the Limited Partnership Roll-Up Reform Act (HR 1885) passed by the House would give investors “dissenters’ rights” requiring that they be paid for their holdings if they choose not to go along with a roll-up.

The bill, introduced by Rep. Edward J. Markey (D-Mass.), would also impose tougher disclosure requirements, require independent fairness opinions, prohibit securities dealers and brokers from having a financial stake in the success of a roll-up and prohibit limited partners from having to pay the costs of an unsuccessful roll-up attempt.

The provisions of the House bill are much tougher than new rules adopted recently by the SEC. The Administration maintains that the SEC rules are sufficient, but Markey disagrees.

“My bill will provide additional consumer protections for the 8 million limited partners nationwide who are today at risk of being subjected to an abusive roll-up,” he said.

The Senate is expected to take action in the next few months on a similar bill (SB 1324) sponsored by Sen. Christopher Dodd (D-Conn.), which also has bipartisan support.