Photo by ssteege1.

Only weeks after giving LivingSocial a $32 million tax break, the D.C. Council will vote on legislation tomorrow that would give similarly give investors in local tech companies some relief on their earnings.

Under the proposal, introduced at the behest of Mayor Vince Gray, 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—which has a six percent tax rate—if they don’t get a lower rate in D.C.

“The District is at risk of losing investors, companies and the revenue that they generate because of our higher tax rate,” said Jose Sousa, spokesman for the deputy mayor’s office. “Since announcing the cap gains proposal, several investors who were considering relocating to Virginia have changed their plans with the expectation of paying the District’s reduced rate next year. Because early stage companies’ locations are closely linked with the location of their investors and advisors, losing angels is the equivalent of losing companies.”

But Ed Lazere of the D.C. Fiscal Policy Institute—which pushed for more concrete benchmarks to be worked into the LivingSocial tax break deal—isn’t convinced. The tax break for tech investors doesn’t make much sense, he said, “because investors in start-up companies make decisions based on the quality of the business and likelihood of success, not the tax rate.” Additionally, he said, “A low tax rate does not turn a bad investment into a good one.” To him, this is simply a way for D.C. to give a nice tax break to wealthy tech investors.

In an Financial Impact Statement produced by D.C. CFO Natwar Gandhi on the bill, he offered another potential reason that legislators might be nervous: if a tech company in D.C. were to have a successful IPO, he said, “depending on the IPO price and the subsequent trading, the revenue losses [for D.C.] could be significant.”

During a committee markup in late June, only Councilmember Muriel Bowser (D-Ward 4) voted against the proposal. D.C. Council Chair Phil Mendelson said today that he hadn’t decided which way he would vote tomorrow, which will be the first of two votes on the legislation.