NEW YORK (TheStreet) -- The Republican takeover of the House during this year's midterm elections could influence a variety of issues relevant to the venture capital community -- a key method of funding for the country's small businesses -- including tax policies, energy and health care.While venture capitalists are likely to favor a Republican stance regarding taxes and health care, they may be disappointed with energy policy. Here's how the issues shake out: Taxes A debate over the Bush-era tax cuts, which are set to expire Jan. 1, could bring up discussion about carried interest tax changes. Carried interest -- profits made after venture capitalists successfully cash out of their portfolio companies -- is taxed at the capital gains rate of 15%. In May, Congress passed a bill to tax carried interest as ordinary income -- as high as 39%. While the Senate failed to secure enough votes to push the bill through this summer, the issue could be revisited as part of larger overall tax reform legislation when the new Congress is installed next year. Proponents of carried interest say it encourages venture capital firms to invest in young, risky companies, and the results of not doing so could be damaging to the economy. "Taxing gains on venture funds would be atrociously poor policy, as it's a direct tax against job creation in areas that our country needs most," said Mark Teerbeek, a partner at MK Capital in Los Angeles. While venture capital investments comprise only 0.2% of the U.S. GDP, venture capital is responsible for more than 21% of the nation's GDP through job creation, according to the National Venture Capital Association Energy Energy is another major policy issue affecting venture capital likely to be influenced by a Republican-controlled House. Venture capital firms, which last quarter invested more than $625 million in cleantech according to PricewaterhouseCoopers, depend on public policy conducive to innovation in the energy sector. "If you look at putting more funding in universities to commercialize innovation with biofuels at the University of Wisconsin or a solar project at the University of California-Berkeley, you have great opportunities to create new inventions that will turn into real companies through venture capital funding," said Josh Green, a partner at Mohr Davidow Ventures who specializes in cleantech investments. "They just need more provocative government policies to get them out the door." Programs like the Advanced Research Projects Agency- Energy (ARPA-E), which promote research and development of advanced energy technologies, could be dismantled by the new Congress looking to cut costs. The retirement of key supporters of science and innovation and the appointment of a new chairman for the House Science and Technology Committee could also put the program in jeopardy, NVCA said.
In addition, congressional funding for Energy Secretary Steven Chu's program to solve energy problems through the creation of eight innovation hubs could be curbed due to budget cuts. So far, Congress has allocated $22 million for partial funding of three hubs, but the future of the program remains uncertain. Health care The recently passed health care reform bill included a 2.3% tax on medical device companies, which investors claim will make it more challenging for venture firms to identify emerging technologies that address important medical needs and bring them to market. The tax will impact medical device startups more than established companies, Green said, because they are in earlier stages of development and profitability. Some venture capital firms claim that the tax will also limit investments in medical device startups. Venture capital in the life sciences sector -- which includes the medical device industry -- comprised the second highest total of VC dollars invested in any category in the most recent quarter. Over $944 million was invested in the sector, with medical devices claiming 61% of dollars. A Republican-controlled Congress will likely look to repeal this tax, and if not successful, the venture capital industry may push for a tax exemption for small companies. --Written by Olivia Oran in New York. >To follow the writer on Twitter, go to http://twitter.com/Ozoran. >To submit a news tip, send an email to: email@example.com.