The recession-spawned push to draw more business investment to Minnesota has led state lawmakers from both sides of the aisle to craft proposals for giving tax breaks to investors who put money into startup ventures.
Gov. Tim Pawlenty plans to unveil a so-called angel investment tax credit proposal in his supplemental budget, which will be released late this week or early next. The Republican governor’s proposal will be nearly identical to a bill sponsored by Rep. Jim Davnie, DFL-Minneapolis, an unlikely pairing that has drawn smirking references to the “Pawlenty-Davnie bill.”
Harry Norris, CEO of Rapid Diagnostek, a technology company that pulled up stakes and moved from St. Paul to Hudson, Wis., last year, told a joint hearing of the House Taxes and Bioscience committees that his firm left to take advantage of Wisconsin’s tax provisions, which give investors an income tax credit for putting their money in risky high-tech ventures.
“I knew we had to move to Wisconsin to get it funded,” Norris told the hearing, which was attended Tuesday by a near-capacity audience in Room 200 of the State Office Building.
But most of the venture capitalists and contract lobbyists gathered at the hearing — many of them wearing stickers to express their support for an angel credit — were shaken up when nonpartisan House Research lawyer Joel Michael delivered a report questioning the popular view that Minnesota is withering on the vine while Wisconsin becomes the Silicon Valley of the Upper Midwest.
Prepared at the request of Taxes Chairwoman Ann Lenczewski, DFL-Bloomington, an ardent opponent of most any kind of tax credit, Michael’s report asserted that Minnesota handily outpaces Wisconsin in per capita venture capital financing.
“It’s not a small margin. It’s a fairly substantial margin,” Michael said. The report compared Minnesota and Wisconsin’s laws and their respective performance in attracting startup companies.
There’s no doubt that Wisconsin has enacted more legislation geared toward getting venture capitalists to open their checkbooks. Among the key Wisconsin tax laws:
• A so-called CAPCO tax credit for insurance companies that invest their capital in later-stage ventures.
• $47.5 million in state money for angel investment tax credits for people who invest in startups.
• A 25-percent tax credit for investment in funds that serve early-stage firms.
• A 60 percent tax exclusion for most long-term capital gains in investments held since the early 1980s.
Minnesota’s cupboard of tax incentives, by contrast, is bare.
Michael noted that Minnesota has had venture capital incentives in state law in the past. For example, Minnesota had a capital gains tax exclusion until lawmakers repealed it in 1987.
Advocates for the Wisconsin-style angel investor tax credit bristled at Michael’s report, as did some legislators, including Davnie. In particular, the report questioned the wisdom of implementing such a tax credit in Minnesota.
Because Minnesota has so much more venture capital activity per capita than Wisconsin, Michael suggested, it would take a lot of state money to provide incentives that reach past those venture capitalists who already planned to invest their money here regardless of state tax law.
Michael’s report looked at the difference between giving tax credits to investors and grants to startup companies. The report noted that early-stage companies, which typically are not yet profitable, would not have income tax consequences from receiving grants. In the case of tax credits, by contrast, the investors who stand to benefit are likely to be in the top income tax bracket, and therefore might lose 30 percent of the value of the credit to Uncle Sam through federal tax liabilities.
“Thirty percent of a tax credit goes to the federal government. You better have a mammoth multiplier to justify it,” Lenczewski said.
Lenczewski has introduced a grant program that would raise $11 million for grants to biotech, high-tech, medical device or green manufacturing firms that have raised at least $100,000 in private investment. Lenczewski proposes to pay for the grants by slowing down the state’s gradual move to taxing corporations solely based on sales. Despite her clear personal preference for grants, Lenczewski has also introduced a 25 percent income tax credit for angel investors.
The angel tax credit’s fervent supporters, such as Bioscience Division Chairman Tim Mahoney, DFL-St. Paul, have said that the credits give investors “some skin in the game.” That’s not the case when you give the money to a company in the form of a grant, Mahoney said.
Michael said, however, that grants don’t necessarily alienate investors.
“You can design a grant to get investors involved,” Michael said.
The details of the report, coupled with Lenczewski’s criticism of angel tax credits, sent the crowd of angel investor advocates who attended the hearing into a tizzy.
Jay Hare, a partner at Price Waterhouse Coopers, responded that Michael’s report doesn’t take into account the rate of growth that has occurred in Wisconsin.
“The last six pages I don’t agree with, and unfortunately that’s where the conclusions lie,” Hare said. (The 26-page report is available online at the House Taxes Committee page.)
Norris said he doubts that the government will be able to judge which companies deserve grants.
“I have no idea how the government, through grants, is going to do the technical due diligence,” he testified.
One lobbyist, who was fuming about the report after the hearing, noted that the debate could get ugly as it plays out this session.
Lenczewski said there will be more scrutiny of the angel tax credit in her committee, despite the likelihood that some sort of angel proposal will advance this session. Lenczewski said she wants to make sure the incentive amounts to good tax policy. Otherwise, she warned, the DFL-controlled Legislature stands to give a tax subsidy to people making $300,000 a year without thoroughly vetting the idea.
“There are a lot of assertions from folks without any evidence,” Lenczewski said.
Angel investment bills
The following pieces of legislation concerning tax credits or grants for start-up business investment have been introduced so far this year.
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