Helping Silicon Valley for a good while has been a California state tax deduction for those who found and invest in startups. The deduction allowed entrepreneurs and angels to exlude 50% of any gain on the sale "qualified small business" stock.
This reduced the capital gains rate to 4.5%, enticing entrepreneurs to launch and keep their companies in Silicon Valley. Now the state is abruptly eliminating the tax deduction. And to add to the slap in the face, it's eliminating the tax retroactively, all the way back to 2008.
"Anyone who sold their California company in the past five years and took advantage of the tax deduction is now going to have to pay the tax," explained Business Insider editor-in-chief Henry Blodget. "With interest."
"California changed the rules after the fact, and that’s just not right," wrote entrepreneur Brian Overstreet in Xconomy. "More importantly, the FTB’s radical action is going to send a terrifying message that will have the unintended consequence of driving young, growing businesses to friendlier environments. That’s the last thing that the state of California needs right now."
While this is bad news for Silicon Valley, it may prove good news for Canada: local startups may find fleeing south to be a decidedly less desirable option.