Photo by ssteege1.

The D.C. Council comes back into session this week, and today the city’s legislature will tackle a bill that may well spur some interesting debate over what types of incentives—if any—tech companies should be given to set up shop in the city.

Under the proposal—introduced at the behest of Mayor Vince Gray earlier this year and known as the Technology Sector Enhancement Act—investors in qualifying tech companies would only have to pay a three percent tax rate on their earnings, far below the 8.95 percent paid by anyone else. Both new and preexisting investments would be covered by the new rate. Additionally, companies would be exempt from business franchise taxes for five years.

According to the office of the Deputy Mayor for Planning and Economic Development, the legislation would help grow D.C.’s burgeoning tech sector by allowing companies to more easily woo investors, retain existing D.C.-resident employees who might have stock options in the company and “recycle local capital gains in the form of angel investments and tech spinoffs.” And much like other debates on tax rates, city officials warn that tech companies could decamp to Virginia if they don’t get a lower rate in D.C.

Gray has been pushing hard for the bill, having visited a new tech incubator earlier this week on K Street to make the case that with possible federal spending cuts and the subsequent effect it could have on the region, D.C. needs to stay a step ahead and invest in fast-growing industries. In July, Gray signed legislation giving D.C.-based LivingSocial $32 million in tax breaks under the expectation that the company will remain in the city, continue to grow and hire more and more D.C. residents.

Evan Burfield, who has founded tech companies in D.C. and Northern Virginia and heads Startup D.C., told us that a “really limited ecosystem” for tech startups exists in the region, and that incentives like those proposed by Gray are needed to lure wealthy individuals into investing in them and keeping them in D.C. “This is about getting people to do what they otherwise might not do,” he said. Jonathon Perelli, the founding partner of The Fort, the incubator Gray visited, tweeted yesterday: “Startups don’t take off without the wings (checkbooks) of Angels.”

But like any bill that offer tax breaks for a select group, this one has attracted opposition, this time from the D.C. Fiscal Policy Institute, which said yesterday that this was less about offering incentives and more about cutting a few existing wealthy investors a break on their taxes. Greater Greater Washington has also come out against the bill, saying that angel investors won’t really be motivated by a slightly lower tax rate more than they will by a startup that they know will do well.

D.C. CFO Natwar Gandhi has also provided two more reasons to be concerned: the definition of a tech company is somewhat nebulous, and if a tech company in D.C. were to have a successful IPO, D.C. could lose out under the provisions of the bill. “[D]epending on the IPO price and the subsequent trading, the revenue losses [for D.C.] could be significant,” he said in a Fiscal Impact Statement.

Those concerns seem to have attracted enough attention that the council could strip the bill of the tax incentive for tech investors, according to a tweet from the Post’s Tim Craig today. For Burfield, though, that means that tech companies will simply opt to locate outside of D.C., where capital gains tax rates are lower.